A matter of tax http://matteroftax.belfint.com Thu, 10 Aug 2017 12:12:09 +0000 en-US hourly 1 Do you have a first time college bound student? Learn more about the American Opportunity Tax Credit now as an upcoming tax strategy. http://matteroftax.belfint.com/do-you-have-a-first-time-college-bound-student-learn-more-about-the-american-opportunity-tax-credit-now-as-an-upcoming-tax-strategy/ http://matteroftax.belfint.com/do-you-have-a-first-time-college-bound-student-learn-more-about-the-american-opportunity-tax-credit-now-as-an-upcoming-tax-strategy/#respond Thu, 10 Aug 2017 12:12:09 +0000 http://matteroftax.belfint.com/?p=1361 Posted by Diana Saputelli

Are you the proud parent of a recent high school graduate?  Are you preparing for your son or daughter’s college move-in day?  If you are then you are probably looking ahead to plan your tax strategies now for your 2017 return.  The education credits available in 2017 are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).  In prior years the Tuition and Fees Deduction was another option; however, as of the posting of this blog, Congress has failed to renew the Tuition and Fees Deduction and it is unclear whether or not lawmakers will renew the deduction retroactively this year.   All three options could be used on the same tax return as long as they were not all used for the same student.

You may be wondering which strategy is best for you.  In order to answer that you must first understand the differences between the two main strategy categories – tax deductions and tax credits.  The two sound very similar yet the impact on your tax return could be significant.  The differences, simply put, are a tax deduction reduces your taxable income with your benefit being that of your marginal tax bracket.  Whereas the AOTC is a dollar-for-dollar direct reduction of your tax bill.  For this reason credits are generally perceived as preferred over deductions. This is not to suggest that tax credits are always better than tax deductions.  In most cases the expense itself determines which category you will be choosing which is where tax planning with your accountant is beneficial.

Let’s look at the American Opportunity Tax Credit (AOTC).  This is an education credit used towards “qualified education expenses paid for an eligible student for the first four years of higher education”.  The maximum credit per eligible student per year is $2,500 for up to $4,000 a year in tuition.  The student must be enrolled at least half time for at least one academic period beginning in the tax year.  The AOTC is available for a maximum of four years of undergraduate tuition paid per student.  The $2,500 AOTC is subject to the AGI phase-out which is non-refundable; however, if you don’t have a tax liability, you can still qualify for a refund up to $1,000 which is refundable.

What expenses qualify?  Amounts paid for tuition, fees (including student activity fees required for attendance) and expenses for books, supplies and equipment the student needs for a course of study (even if the monies are not paid to the school).  Room and board does not qualify.  The school should issue a Form 1098-T (Tuition Statement) by January 31.

In most cases, the AOTC is the first credit used by those with qualified higher education expenses allowing the Lifetime Learning Credit (LLC) to kick in after the AOTC is exhausted.  Please contact our office to discuss your individual tax planning needs.

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Changing Jobs? Are You Forgetting Something? http://matteroftax.belfint.com/changing-jobs-are-you-forgetting-something/ http://matteroftax.belfint.com/changing-jobs-are-you-forgetting-something/#respond Thu, 27 Jul 2017 12:11:03 +0000 http://matteroftax.belfint.com/?p=1367 Posted by Jorge Guerrero, CPA

We live in an ever-changing world. Some areas which will most likely change many times during your lifetime include your car, job, the place where you live, your hobbies, your relationships with others, and even the organizations you associate with.  According to the U.S. Bureau of Labor Statistics, a typical person will have 11 to 12 jobs in his or her lifetime.  In other words, it is not uncommon for a person to change jobs every three to five years!  When you consider the U.S. Census Bureau reported 11.2 percent of our population changed their addresses in 2016, it’s no wonder things like retirement accounts fall through the cracks and are forgotten about.

In today’s world, companies often offer a variety of benefits to attract talent.  These benefits usually include some type of retirement savings plan and like everything else have terms that vary from company to company.  For example, Company A may require six months of service to enter their plan while matching three percent of contributions but Company B may only require three months of service but match two percent of contributions.  As a general rule, saving for retirement is always a good idea and leaving “free money” in the form of matching contributions on the table is always a bad idea. Therefore, it is a great idea to participate in your employer’s retirement plan but this especially true when matching contributions are part of the plan.

The question remains, what happens to your money in the plan when you leave your employer to accept a position elsewhere?  Are you able to keep your money in their plan or do you need to move it?  What happens if you must move it but don’t within a specified time? Is there a vesting requirement on the employer’s contributions? Questions like these show just how important it is to read the plan’s information document when you go to make “the jump” because not doing so could be costly.

Many plans require employees to take their money with them within a given period of time if their balance is less than a certain amount.  In this case, failure to transfer your balance to another retirement account could result in an unexpected check in the mail for your “vested” account balance less withholding taxes followed by a Form 1099-R “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.” sent in January.  This can be a very expensive mistake, especially since the IRS imposes a 10% penalty on distributions from “pre-taxed” retirement accounts in addition to the normal income tax when you file your tax return.  Roth accounts (post-tax retirement accounts) will face a penalty on the income portion of the distribution but not the contributions made.  The penalty does not apply to individuals age 59½ or older by the end of the tax year.  The penalty may also be avoided if the entire GROSS amount (not the amount received) is deposited into an IRA within 60 days of the distribution.   You would receive the tax withheld when the tax return is filed.

What further complicates the matter is a person who changes his or her address every three to five years. In this case, leaving your money with a former employer may not be best idea.  After a few job changes and moves over a 10 to 15-year period, will you even remember that you have the account? Will you remember to keep your address up to date with the former plan?  If your new employer allows for transfers into their plan this may be your best option.  Another option is to roll the money into an IRA (or ROTH IRA if the account contained after-tax contributions).  This can be done through your local bank, credit union, or brokerage.  Rolling your money over into another retirement plan or IRA will result in you receiving a 1099-R in January but will not result in additional tax or penalties. One of the additional benefits of rolling the money over to the new employer’s plan or an IRA is the potential savings on fees you were paying to the old plan.

The contributions you personally make to any retirement plan are by law are always 100% vested and cannot be forfeited. If however, the plan has a vesting requirement on employer contributions, not meeting the service requirements means loss of part or all of the employer’s contributions to your account.   Many companies have a graduated vesting requirement of five or six years.  For example, Company A has a graduated vesting requirement where the employee receives 20% vesting per year starting at year two and achieves full 100% vesting at their sixth anniversary.  In this case, changing jobs after 3½ years could result in forfeiting 60% of the contributions that your employer made to your account.  For some, this forfeiture could be expensive, but at least it does not trigger a taxable event.

In conclusion, when changing jobs, make sure you know what is going to happen to your retirement account. READ THE PLAN INFORMATION DOCUMENTS!  If permitted by your new employer, consider moving your money to your new employer’s plan; if not, roll it over to an IRA.  This will keep your money together and easier to manage…especially if you move every few years.

If you have any questions about how to avoid paying unnecessary taxes on your retirement plan rollover, please consult one of our tax professionals.

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What You Need to Know About Gift Tax: Exclusions http://matteroftax.belfint.com/what-you-need-to-know-about-gift-tax-exclusions/ http://matteroftax.belfint.com/what-you-need-to-know-about-gift-tax-exclusions/#respond Tue, 06 Jun 2017 16:06:47 +0000 http://matteroftax.belfint.com/?p=1341 Posted by Amy Henretty, CPA

Gift Tax Exclusions - Atlanta CPA Firm Gift giving is something that most people do each and every year. What some may not know is the gifts you give may be subject to tax.  If you gift over a certain amount in a calendar year, those gifts could be subject to gift tax. Fortunately, there is a threshold for the amount of gifts given in a lifetime that are subject to taxation. The threshold is very high and most individuals will not be subject to any gift tax at all. There are also certain exclusions and deductions that can reduce the amount of taxable gifts, which further helps to stay under the lifetime gift tax exemption.

The federal estate and gift tax lifetime exemption is $5.49 million for 2017, increased from 2016 ($5.45 million) due to inflation. This means an individual can gift or leave to their heirs up to $5.49 million and pay no federal estate or gift tax. For married couples, the exclusion is doubled ($10.98 million). The exemption is large enough to cover lifetime gifts for most individuals, but if your estate is above that limit you may be subject to tax. To further help individuals stay under this lifetime gift threshold, there are certain exclusions and deductions. The annual per donee exclusion for 2016 and 2017 is $14,000. Therefore, you can gift up to $14,000 to any individual in a calendar year and it will be excluded from the lifetime exemption. You can make gifts up to $14,000 to as many different people as you like and these annual exclusion gifts won’t count towards the lifetime gift exemption. When determining your potential taxable gifts to an individual during a calendar year, you should take the total of all gifts given to that individual during the year and subtract the $14,000 annual exclusion. If you gifted greater than $14,000 to one individual the difference will be taken from your lifetime exemption. For example, if you gifted $20,000 to your sister and $10,000 to a friend during the calendar year, you would have a potential taxable gift of $6,000 ($20,000 gift to sister – $14,000 annual exclusion = $6,000 and $10,000 gift to friend – $14,000 annual exclusion = $0). This $6,000 taxable gift would be subtracted from your lifetime exemption. If you are married, you and your spouse can combine the annual exclusion, thus gifts made to each individual can be made up to $28,000 without being counted towards your lifetime exemption.

Gift tax and the annual exclusion limit apply whether you are making a gift to a stranger, friend, or your own children. However, any gift to your spouse is exempt from gift tax. Gift giving to your spouse qualifies for the marital deduction. Consequently, any gifts between you and your spouse will not impact the lifetime exemption.

There are also exclusions for gifts made for educational or medical purposes. If you make a payment directly to a qualified educational institution for the benefit of your children or grandchildren or anyone else, this “gift” would qualify as an exclusion from the lifetime exemption, and there is no limit on how much you gift. The same applies to payments made on behalf of someone else for medical expenses, if the payments are made directly to the medical care provider.

Gifts can also be made to certain organizations without any gift tax implications. In determining taxable gifts for a calendar year, a deduction is allowed for the amount of all gifts made to the United States government, any State government, or a corporation operated exclusively for religious, charitable, scientific, literary, or educational purposes.

In determining a taxable gift, the value of any gifted noncash property should also be analyzed. When gifting someone property that you own, the fair market value of the property at the time of the transfer is the amount that is considered the taxable gift. The $14,000 per donee annual exclusion rules apply to noncash gifts as well. When the donee receives the property, the adjusted basis of the property you owned becomes the basis for the donee.

A federal gift tax return (Form 709) needs to be filed if gifts to any individual in the calendar year exceed the annual exclusion of $14,000 and no exclusions apply. For instance, per the example above, the individual would be required to file a gift tax return for the $6,000 gift that was over the annual exclusion. It is important to note that only individuals can file a gift tax return. If a corporation or trust makes gifts, the filing requirement for that gift passes to the shareholder or beneficiary. Form 709 is due by April 15 of the year after the gift was made and a six-month extension is available. In addition, some states have gift tax filing requirements which vary from state to state.

If you believe you have made a taxable gift over the annual exclusion or would like more information on the taxability of gifts, please contact our office to discuss your situation and possible gift tax filing or planning needs.

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Trusts and Estates – What’s Your Role? http://matteroftax.belfint.com/trusts-and-estates-whats-your-role/ http://matteroftax.belfint.com/trusts-and-estates-whats-your-role/#respond Tue, 09 May 2017 12:00:48 +0000 http://matteroftax.belfint.com/?p=1310 Posted by Lee Sausen, CPA

Estates & Trusts Fiduciary Duty - Delaware Tax Planning For most Estates and Trusts, there are three parties involved: (1) the person who funded the Trust (or passed-away in the case of an Estate) – called the Grantor/Contributor/Donor for a Trust or the Decedent for an Estate; (2) the person(s) who are in charge of following the rules of the governing document and managing the assets – called the Fiduciary – can be the Trustee for a Trust or the Executor/Administrator/Personal Representative for an Estate; and (3) the person(s) who ultimately receive some type of benefit from the Trust/Estate’s assets (or the assets themselves) – called the Beneficiaries. In many cases, one of the beneficiaries (or the sole-beneficiary) may also be the Trustee or Executor.

The Trustee/Executor must act on behalf of the Beneficiaries, no matter what. This responsibility – known as Fiduciary Duty – is the highest standard of care that common law allows. There are many responsibilities inherent in becoming the Trustee or Executor of a Trust or Estate. For an Estate, the Executor is responsible, among other things, for:

  • Filing Form SS-4 to apply for the Employer Identification Number (EIN).
  • Filing Form 56 to notify the IRS of the fiduciary relationship.
  • Filing applicable Federal and State tax returns such as the final Form 1040 (U.S. Individual Income Tax Return), Form 1041 (U.S. Income Tax Return for Estate and Trusts), Form 706 (U.S. Estate Tax Return), Form 709 (U.S. Gift Tax Return), and others.
  • Notifying the Social Security Administration
  • Probate and other State filings
  • Paying any creditors and taxes owed – in some cases, an Executor may be held personally liable for any unpaid tax.
  • Collecting all of the decedent’s property.
  • Following the “Prudent Investor Rule,” which states that an Executor/Trustee must invest any assets held in the Estate/Trust as if they were their own assets.
  • Distributing the assets to the Beneficiaries according to the Will/Trust (assuming the Decedent created a Will).

Many of the responsibilities for the Trustee of a Trust are the same as those of the Executor of an Estate. The Trustee of a Trust must act in accordance with the governing document of that Trust, as submitted by the Grantor. The following are some common additional responsibilities that can be included in some Trusts:

  • Periodic financials or “accounting” – reporting financial information to Beneficiaries and/or municipalities. This process varies by State and County.
  • Periodic income distributions. Determining the net income for a given period (usually monthly or quarterly) and distributing that net income to the applicable beneficiaries.
  • The Trustee may obtain assistance from a CPA or Attorney in fulfilling these requirements, but it’s the Trustee who is ultimately responsible for the execution and accuracy of any filings or distributions.

Please note that the above lists of fiduciary responsibilities are not exhaustive. Governing documents can be flexible in some areas and un-flexible in others. Please consider forming a team of advisors for your Trust or Estate plan to include your CPA, Attorney, and Financial Advisor. If you would like to discuss your Trust or Estate plan in more detail, please reach out to our Estate and Trust team.

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What about your Health Savings Account when you pass away? http://matteroftax.belfint.com/what-about-your-health-savings-account-when-you-pass-away/ http://matteroftax.belfint.com/what-about-your-health-savings-account-when-you-pass-away/#respond Mon, 24 Apr 2017 12:00:15 +0000 http://matteroftax.belfint.com/?p=1280 Posted by Emily Schmidt

Health Savings Account Beneficiary - Delaware CPA FirnHealth Savings Accounts (H.S.A.s) are powerful tools, particularly if you participate in a high deductible health insurance plan. H.S.A.s are essentially tax-exempt accounts to fund certain medical costs you may incur. You may deduct contributions you or an individual other than your employer makes to your H.S.A. on your behalf. A deduction for H.S.A. contributions is available to you even if you do not itemize your deductions on your return. Furthermore, your employer may also make contributions to your account. In this case, your employer’s contributions are excluded from your income. You may use distributions from your account tax-free for qualifying medical expenses. Any unused funds roll over from year-to-year. Additionally, all interest and investment earnings to your H.S.A. are tax-free. You may now be familiar with the benefits of your H.S.A. while you are alive, but do you know what would happen to your H.S.A. when you die? Where do the funds go? What are the tax consequences? In essence, the fate of your H.S.A. funds will be determined based on whom you designate as the beneficiary.

Spouse as a Beneficiary

A spouse is the most commonly designated beneficiary. When your spouse inherits your H.S.A. on the date of your death, the account will retain its character and legally become theirs. This transfer does not require your spouse to have an H.S.A. eligible health insurance policy. Moreover, your spouse will be able to utilize the funds to pay for medical expenses; including long term care premiums. In other words, the provisions of the H.S.A. will apply to your spouse as they had applied to you. In addition, once your spouse turns 65, account assets can be used for any type of expense without incurring a 20% penalty on the distribution. The particular expense does not have to be medically related. With that being said, it may be most advantageous for your spouse not to access the inherited H.S.A. funds until they reach the age of 65.

Non-Spouse Beneficiary you designate an individual who is not your spouse as the beneficiary, the H.S.A. classification of the account funds terminates upon transfer. The fair market value of the H.S.A. at your date of death becomes taxable to the beneficiary. The taxable amount will be reduced by any qualified medical expenses the beneficiary had paid for you within one year of your death.

Estate as a Beneficiary

You also have the option to designate your estate as a beneficiary. If you do not designate a beneficiary, your estate automatically becomes the beneficiary. In this case, the fair value of your H.S.A. will be reported on your final 1040. You will be able to take advantage of tax savings in the form of a deduction for estate taxes paid on the value of your H.S.A. included in your taxable estate.

In summary, you must consider all outcomes carefully when you complete your beneficiary form for your H.S.A. If you do designate a beneficiary, ensure they also understand the applicable tax implications when they receive the funds. To receive more information regarding H.S.A.s including limits and timing of contributions; please feel free to contact one of our knowledgeable tax advisors.

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Tax Planning For Teenagers – Roth IRA’S http://matteroftax.belfint.com/tax-planning-for-teenagers-roth-iras/ Wed, 12 Apr 2017 12:00:26 +0000 http://matteroftax.belfint.com/?p=1245 Posted by Mike Abernathy

Many people may not be aware of the fact that teenagers may contribute to IRA’s. The only requirement to contribute to an IRA is the taxpayer must have earned income. Earned income is income derived from working, as opposed to investment earnings, which are not considered earned income. Annual IRA contributions are limited to the amount of the taxpayer’s earned income during the year and are capped at $5,500 for those under age 50. This means any teenager who works a summer job is eligible to contribute to an IRA. Teenagers have a few special circumstances which make the Roth IRA a particularly attractive investment vehicle.

Teenagers’ youth gives their retirement savings more time to grow than the rest of us have. Assuming a 7% annual return, if a 17 year old who plans to retire at age 67 makes a $5,500 contribution, that amount would grow to $162,000 by retirement. The same contribution made by a 27 year old would only grow to $82,000 by age 67. This early start amounts to roughly a doubling of the investment account balance by retirement age. Keep in mind investments held in an IRA grow tax free.

If a teenager’s only income was a part time job it is likely they would have a very small tax liability, if any, making the Roth IRA a much more attractive option than the Traditional IRA. The tax savings lost from the Traditional IRA deduction given up would be minimal. Also, Roth IRA distributions during retirement are not taxable, whereas Traditional IRA distributions are.

Since most teenagers live at home with their parents a large percentage of their income is likely to be disposable income. It is one of the few times in their life they will have the opportunity to save most of what they earn. Although they will have a much higher income later in life, setting aside a few thousand dollars may be more difficult to do once they are financially responsible for themselves.

Even if the teenager does not want to invest their money, a generous parent may choose to make a contribution on their child’s behalf. Parental contributions are permissible as long as the contribution does not exceed the amount of earned income the child had during the year.

For more advice on the most tax efficient savings vehicles for your goals, consult your tax advisor.

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Tax Consequences of Divorce: Part 2 – Retirement Benefits, Investments, and Business Use Property http://matteroftax.belfint.com/tax-consequences-of-divorce-part-2-retirement-benefits-investments-and-business-use-property/ Wed, 05 Apr 2017 12:00:48 +0000 http://matteroftax.belfint.com/?p=1221 Posted by Jorge Guerrero, CPA

Tax Consrquences of DivorceRetirement Benefits

In a divorce or separation agreement, retirement benefits are transferred between spouses through what is known a “qualified domestic relations order (QDRO).” Using a QDRO, the court orders payment of benefits from one spouse who has an interest in a plan to the other spouse who originally did not.  Normally, distributions are taxable when made from pension plans holding pre-tax contributions such as 401(k), 403(b), and IRAs. The transfer of an interest is similar to a qualified rollover in that as long as the destination account is a similar type of retirement account, the transfer is not taxable. For example, the divorce court orders Sally’s employer to transfer a 50% interest of her 401(k) to Bill’s IRA as part of the divorce decree. Since both Sally and Bill’s accounts qualified tax deferred retirement accounts, no tax is due for either party. However, if Bill’s retirement account is a Roth IRA, an after-tax account, he would follow Roth conversion rules and report the transfer as income but face no penalties. Sally would not report any income from the transfer because according to Code Section 402(e)(1)(A) distributions that are not rolled over to a similar qualified retirement plan are taxable to the alternate payee not the participant spouse.

Now assume that Bill takes the money he received from the interest in Sally’s 401(k) and invests it into his landscaping business. The distribution once again is not taxable to Sally. Bill however must follow the rules governing distributions from qualified retirement plans. In other words, the distribution is reported as income to Bill and if he is under age 59 ½, he would be subject to penalties.


As one might expect investment transfers often have hidden tax consequences. If the investments received are mutual funds or investment partnerships, there is the possibility of unexpected income distributions such as capital gain distributions at year end. It is not uncommon for an investment partnership to report income from dividends, interest, capital gains or event rental income. To make matters worse, these distributions are often reinvested so no cash received. In these cases understanding the investment’s history is important to tax planning. It is important to make estimated tax payments to avoid unnecessary tax surprises including underpayment penalties.

When transferring investments between spouses it is important for the receiving spouse to receive the basis information of any investments. According to IRS rules, the receiving spouse steps into the shoes of the transferring spouse. In other words, receiving spouse’s basis in the investment the basis is that of the transferring spouse. The IRS requires the basis to be set at ZERO If it cannot be proven. This means a stock sold for $10,000 with zero basis creates a $10,000 capital gain! If the spouse could prove that the basis was $8,000, the gain reported becomes $2,000. Getting support for basis from the transferring spouse is critical for this reason.

Business Use Property

The act of transferring “business use property” may cause a tricky situation in that knowing the original cost of the property is helpful but may not tell the whole story. Just as with investments, the receiving spouse takes the basis of the transferring spouse. A depreciation schedule showing the book value of the property is most important piece of information that the receiving spouse needs. This report will give the receiving spouse the book value and alert the spouse of any Section 179 or Bonus Depreciation taken on the property. If the receiving spouse does not continue to use the property for business purposes, any Section 179 or Bonus deprecation taken may be subject to recapture rules.

For example, Sally receives a small tractor from Bill’s lawn service as part of their divorce. Bill purchased the tractor for his schedule C business for $2,500 two years earlier and claimed a section 179 deduction for the entire amount on their jointly filed tax return. Sally plans to use the small tractor maintain the landscaping of her home. Since Sally does not plan to use the tractor for business purposes, she must recapture the Section 179 depreciation taken on her tax return. If Bill just depreciated the tractor and did not take the section 179 deduction, Sally’s basis in the tractor would be the $2,500 less the depreciation Bill deducted on their return.


The act of dealing with a divorce can be a very traumatic experience. The temptation to rely solely on your attorney may be unwise when there many assets are involved. Having an experienced tax professional involved during the process may not seem like wise investment at the time but with proper planning, the tax saved down the road is often much more than the fees paid.

If you want to learn more about how your situation is affected by the tax code, please contact one of our experienced professionals.

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Saving For Your Child’s Education http://matteroftax.belfint.com/saving-for-your-childs-education/ Mon, 27 Mar 2017 12:00:58 +0000 http://matteroftax.belfint.com/?p=1169 Posted by Mike Kelly, CPA

529 College Savings Plan The cost of education continues to rise each year, so it is helpful to be aware of some programs that allow parents to save for the cost of their children’s education.

A parent can make contributions to a qualified tuition program (commonly known as a 529 Plan) or an education savings account (commonly known as Coverdale savings accounts) as a way to save for their children’s education. There are many similarities between the two saving vehicles but there also major differences, which are listed below.


Key Similarities

  • Distributions from these accounts are not taxable as long as they are used for qualified expenses. So if the account accumulates a few thousand dollars of earnings over its lifetime, those earnings escape taxation. If the distributions are not used for eligible expenses, the earnings portion are taxable and are also subject to a 10% penalty.
  • Both savings vehicles cover qualified secondary expenses such as tuition, fees, books, supplies and room and board.
  • A taxpayer does not receive a deduction on their federal income tax return for contributions made to either account. However, some states like Pennsylvania and Maryland allow deductions for contributions to 529 programs.
  • Expenses paid with distributions from these accounts cannot be taken into account when claiming educational tax credits nor as deductions on personal income tax returns.
  • Contributions made to these accounts on behalf of beneficiaries are treated as gifts. Gifts made in excess of $14,000 require the filing of a federal gift tax return and could result in gift taxes or the use of taxpayer’s lifetime exemption. However, it is important to note that payments made directly to educational institutes would avoid gift and generation skipping taxes.
  • A student’s financial aid may be impacted by these plans. Generally, accounts opened by the student or the parent are considered owned by the parent for financial aid purposes while an account owned by a grandparent does not count as an asset. A maximum of 5.64% of parental assets are counted in the financial aid calculation compared to 20% for assets considered owned by the student. Distributions received from accounts owned y parents or a student do not count as income for financial aid purposes. However, distributions from an account owned by a grandparent could reduce a student’s financial aid for the following year by 50% of the distribution. Therefore, it may be a good planning idea for grandparents to gift funds directly to parents and have the parents contribute to a plan. If that is not an option, it would be best for the student to use funds from a grandparent’s plan when it is likely that financial aid won’t be available the following year since current year distributions only impact the following year’s formula.

Key Differences

  • Contributions cannot be made to education savings accounts if joint income exceeds $220,000 ($110,000 for single filers)
  • Contributions to education savings accounts can only be made if a beneficiary is under the age of 18.
  • Contributions to education savings accounts are limited to $2,000 a year while contributions to qualified tuition programs are limited to the amount necessary to provide for the qualified expenses of the beneficiary as determined by the plan (Usually capped at $200,000 for most plans).
  • Contributions to qualified tuition programs can be treated as made ratably over a 5-year period for Federal gift tax purposes. Therefore, a potential gift tax could be avoided as long as it does not exceed five times the annual exclusion of $14,000. For example, if a grandparent contributes $70,000 to a plan for his grandchild in a given year, the $70,000 could be treated as a contribution of $14,000 each year over a 5-year period. However, in order to receive this special treatment, a taxpayer must file a gift tax return and make an election on it.
  • In addition to post-secondary expenses, education saving accounts can be used for educational expenses from kindergarten through twelfth grade.

Like most things in life, it’s always best to start saving as early possible to maximize the growth of earnings so they can be used to offset future educational needs. But it’s important to remember that earnings must be used for qualified educational expenses because the penalties can be harsh if they are not. It’s also important to know that other savings vehicles like education trusts are available. Each person’s goals and situations are different and it is best to have an understanding of all existing options.

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New Diversification Requirements for Captive Insurance Companies http://matteroftax.belfint.com/new-diversification-requirements-for-captive-insurance-companies-2/ Fri, 17 Mar 2017 12:00:20 +0000 http://matteroftax.belfint.com/?p=1141 Posted by Adam Necelis, CPA

Captive Insurance Company Diversificaiton - Delaware CPA Last December when Congress passed the Protecting Americans from Tax Hikes Act of 2015, or PATH Act as it is more commonly known, many tax provisions were impacted. One such provision that was impacted by the PATH Act is related to captive insurance companies. Section 831(b) of the Internal Revenue Code (IRC) allows for small property casualty insurers to be taxed on their investment income only and not on their insurance premium income. Prior to the passage of the PATH Act of 2015, a small insurer was considered to be an insurer who received less than $1.2 million of annual insurance premiums. This was the annual volume amount determined by the Tax Reform Act of 1986, which was the last time any significant changes were made to Section 831(b). With the passage of the PATH Act, the annual premium has increased to $2.2 million, starting in 2017, and will be adjusted for inflation going forward.

In addition to increasing the annual premium to determine who qualifies as a small insurer, the PATH Act also added diversification requirements not included in the previous language. The diversification requirements are designed to prevent companies from taking advantage of and abusing the benefits that are provided by Section 831(b). The benefits provided by Section 831(b) are very advantageous. Consequently, some companies would artificially manipulate the premiums to maximize their benefits. The new requirements are meant to combat those tactics. The IRS recently named abusive tax shelters, including the misuse of captive insurance companies, as one of the 2016 “Dirty Dozen” tax scams.

Diversification Test Requirements

The diversification requirements are made up of two tests. The first test is no more than 20% of the net written premiums of the insurer are attributable to any one policyholder. If an insurer meets the first test, the second diversification test is not required. If an insurer does not meet the first test, the second test states “no person who holds an interest in the insurance company is a specified holder who holds (directly or indirectly) aggregate interests in the insurance company that is more than a de minimis percentage higher than the percentage of interests in the specified assets with respect to the insurance company held (directly or indirectly) by the specified holder.” This means that an owner cannot have more than a de minimis ownership difference, defined as 2% for this test, between their ownership percentage in the insurance company and their ownership in the assets that the insurance company is insuring.

With the increase in the annual premium, captive insurance companies are becoming more advantageous.  However, with the addition of the diversification requirements, it will become even more important to seek out professional help to ensure that your current captive insurance company passes one of the two tests. As well as any new captive insurance company properly set-up to ensure it will pass one of the two tests. Failure to comply with the new requirements will prevent your insurance company from receiving benefits under IRC Section 831(b).

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Tax Consequences of Divorce: Part 1 – Alimony and Child Support http://matteroftax.belfint.com/tax-consequences-of-divorce-part-1-alimony-and-child-support/ Fri, 10 Mar 2017 10:00:44 +0000 http://matteroftax.belfint.com/?p=1212 Posted by Jorge Guerrero, CPA

Tax Consequences Divorce - Delaware Tax Planning

Alimony is a payment made to a spouse or former spouse under a divorce or separation agreement. The spouses must not live in the same household and cannot file a joint tax return. Generally, alimony is deducted by the payer spouse and is considered earned income to the payee spouse. The recipient spouse therefore may make IRA contributions based on the amount received. Payments can be made to directly to the recipient spouse or a third party on the spouse’s behalf such as when one spouse is making car payments for the other spouse.  Finally, the payments must end after a defined period of years but no later than the death of the recipient spouse.

In contrast, payments made as required under a divorce or separation agreement to benefit one or more children are considered child support. Child support is not deductible by the payer and not included in income of the payee. Things can get confusing when alimony and child support is required but the payer spouse is behind on the payments. By law, child support payments must be satisfied before alimony.

Imagine that Bill and Sally were a married couple now divorced.  According to the divorce agreement Sally must pay Bill alimony of $12,000 per year for 3 years and $24,000 per year in child support ($12,000 for each of their two young children) until each child reaches age 18.  Assume that Sally makes all of the required payments for year 1 but in year 2 she pays Bill a total $21,000. By law, the entire $21,000 is treated as child support since the annual court ordered requirement was not met.  In addition, if the child support remains delinquent, IRS has the ability to seize Sally’s tax refund, while the court could order Sally’s wages be garnished to satisfy her child support liability.  Sally also would still owe all the unpaid alimony.

There are two other situations that must be considered involving the “front-loading” of payments.  The first situation relates to a rule where alimony is reclassified as child support.  In this case, the divorce or separation agreement may state that the payments are alimony, but if the payments have certain characteristics, some or all of the payments will be treated as child support for tax purposes.  This rule will take effect when payments are reduced due to:

  • The child reaches age 18, 21, or local majority
  • Death of child
  • Marriage of child
  • The child’s completion of school
  • The child leaving the household
  • The child reaching a specified income level
  • The child becoming employed.

For example, assume that Sally only had to pay Bill, the custodial parent $30,000 per year in alimony with the annual payments dropping to $18,000 per year when the first child reaches age 18 and then to $6,000 per year when the second child reaches age 18.  For tax purposes, the law will treat $24,000 as child support and $6,000 as alimony because the alimony is reduced when one of the above contingencies is present.

The second situation involves a law that is designed to prevent taxpayers from attempting to “front –load” deductible property settlements characterized as alimony.  The alimony recapture rule may be triggered when yearly alimony payments decrease or terminate during any of the first three calendar years in which the payments are made. The rule has a $15,000 per year “Safe Harbor” and does not apply when the payments end early due to death of either spouse, remarriage of the payee spouse, a court order, or pursuant to continuing liability. When the amount of alimony paid decreases by more than $15,000 from year one to two or year two to three, the payee spouse may have some or all of the payments recaptured as income.

The situations above do not mention which spouse receives the exemption for a child.  In our example, Bill and Sally have two children. In reality, the law states that the parent who has custody the greater number of nights is the “Custodial Parent” and therefore may claim the exemption for the child. For the noncustodial parent to claim the child, the custodial parent must complete and sign Form 8332 Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent for the noncustodial parent to attach to their tax return.  This form can be used for just the current or multiple years but must be attached to the non-custodial parent’s return in any year the exemption is claimed.

Please contact one of our tax professionals to learn more about how your situation is affected by the tax code.

In Part 2 of our series, we will discuss the hidden pitfalls of several types of property transfers.

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