Category: Tax Planning

How You Can Use 529 Plans in Your Tax Planning

It’s no secret that college is expensive. While this has led to plenty of arguments about the true value of college, most parents still want to give their children this opportunity. They also want to provide as much financial support as they can to make that happen. Whether you’re a parent or grandparent, understanding the different options that are available to help pay for college can assist with your planning. Knowing about these options can also have a positive impact on your tax liability.

 

The Basics of 529 Plans

A 529 plan is a type of investment. The purpose of this investment is to help save for college. The way this plan works is it’s able to accumulate funds on either a tax-deferred or tax-free basis. One important thing to know about these plans is there are actually two different kinds, which are college savings and prepaid tuition plans. Before we explore the differences between those two options, we want to cover the advantages that both types of 529 plans have to offer.

Contributions growing tax deferred and the availability of tax incentives in the state of Ohio and others are the first two advantages. Next is the fact that the majority of 529 plans have high lifetime maximum contribution limits, along with the ability of anyone to open one of these plans regardless of their income. All 529 plans offer professional money management, and an account holder can change the plan’s beneficiary or roll funds from one plan into another.

 

College Savings Plans vs. Prepaid Tuition Plans

Now that we’ve covered the advantages that go along with either type of 529 plan, we want to explain the potential disadvantages of both plan types. With a college savings plan, you relinquish some control of your money and there generally isn’t a guarantee for what the plan will return. And with a prepaid tuition plan, choices are typically limited to in-state colleges and plans may have reduced benefits after enrollment.

 

529 Plans and Your Taxes

It’s important to understand that 529 Plans are not a tax deduction. Instead, they provide the opportunity to reduce the account owner’s taxable income. When money is withdrawn from the account and used to pay for qualified expenses like tuition or books, it will be income tax free. If a withdrawal is made and used for expenses that are deemed as unqualified, it will be subject to income taxes, as well as a 10% penalty.

If you’re looking for expert help with any of your tax planning, we encourage you to learn more about Donohoo Accounting and the tax services we offer.

 

What Are Some Potential Tax Implications of a Trump Presidency?

After a long and very divided election cycle, Donald J. Trump is officially the President Elect of the United States. Because there’s still some time before he officially takes office, people from all walks of life have questions about what his term is going to mean for them personally and the United States as a whole.

Since tax services are our area of expertise, we want to contribute to this conversation by looking at the impact Trump’s presidency may have on the taxes of Americans:

 

The President and Taxes

During the election process, Trump talked about taxes a lot. But before we get into any of those specifics, it’s important to note that the Constitution of the United States does not allow the President to change tax rates or set tax policy. Instead, those are actions that must be approved by Congress. And even though Republicans in the House and Senate now have control of both bodies of Congress, that doesn’t automatically mean they’ll see eye to eye with the 45th President.

 

4 Trump Tax Proposals

The first notable proposal that has come from Trump is reducing the current seven income tax brackets to three. As part of this proposal, the standard deduction amount would be more than doubled for both single and joint filers. Itemized deductions would be capped at $100k for single filers and $200k for joint filings. This plan would also eliminate personal exemptions, the alternative minimum tax and head-of-household filing status.

Another notable proposal has to do with child care. This would take the form of adding a deduction for child care equal to the state average cost of child care for children under age thirteen. This deduction would be available for up to four children, including those with stay-at-home parents or grandparents. The proposal also includes a spending rebate on remaining child care expenses for low-income parents, allowing annual tax-deductible contributions into Dependent Care Savings Accounts and a deduction for the cost of elder care.

The two other proposals we want to touch on both have to do with repealing existing policies. The first is repealing the estate tax. Capital gains above $10 million held until death could be taxed, with family farms and small businesses being exempt. Trump has also proposed repealing the Affordable Care Act net investment income tax.

Although there will definitely be changes over the next few years, most of us will continue living our lives by getting up each day and working hard. If you’re a business owner and want to ensure that you maximize the benefits you’re able to reap from your hard work, learn more about why Donohoo Accounting Services truly understands the challenges faced by small business owners.

 

 

Using Retirement Plan Contributions to Reduce Your AGI

AGI stands for adjusted gross income. This number sets the threshold for certain deductions such as medical expenses. It also determines eligibility for tax credits like the retirement savings credit and American opportunity credit. As its name implies, AGI is something that can change based on certain factors. That’s why we want to cover the effect that contributing to your IRA can have on it, along with another aspect of a retirement plan contribution that can reduce tax liability.

 

How Traditional IRA Contributions Adjust Income

When you make a contribution to a traditional IRA, it receives classification as an adjustment to income. The impact this will have on adjusted gross income is reducing it on a dollar-for-dollar basis. So if you make a fully qualified contribution of $3,000, that’s the exact amount your AGI will be reduced.

While that’s the basic overview of how this type of contribution affects AGI, as with many aspects of the tax code, there are some important considerations to take into account. One is how much of a traditional IRA contribution is deductible. For an unmarried individual who isn’t covered by an employer plan like a 401(k), the amount contributed will be fully deductible.

For people who are married, this type of contribution is only guaranteed to be deductible when neither spouse is part of an employer-sponsored retirement plan. If that criteria is met, contributions made will reduce adjusted gross income. It’s worth noting that while contributing to a Roth IRA can be a smart financial decision, this specific contribution won’t reduce AGI due to it involving after-tax dollars.

 

other Important Notes About Contributions and Retirement Plans

Even for people who are single, if they are covered by an employer plan and their AGI exceeds a certain threshold, their traditional IRA contribution won’t be deducted. Another thing to keep in mind about both traditional and Roth IRA contributions is they can qualify you for the retirement savings credit. If you’re eligible for this credit and claim it, you’ll be able to directly reduce your tax liability.

What’s interesting about the retirement savings credit is even though it lowers tax liability, it does not reduce AGI. That’s because it’s classified as a credit and not a deduction. The main criteria for claiming this credit are being over 18, having a modified AGI that falls below a specified level and not being a full-time student.

As this issue demonstrates, optimizing your tax situation can be quite a challenge. If this is something you want to do but are feeling overwhelmed by the number of questions you have, the best way to get answers and guidance is by enlisting the help of our professional tax services.

 

The 179 Expense Deductions Guide for 2016

If you’re a business owner, you don’t need to be an expert about the IRS tax code. Although it’s obviously very important to meet your tax obligations, you can hire an experienced tax professional to assist you. By getting tax assistance and guidance from the right professional, you can stay on top of all your obligations and ensure you don’t miss out on any opportunities to reduce how much you owe.

Section 179 is the perfect example of an option that can help businesses reduce what they owe. While sections of the tax code can seem very complicated or even mysterious, this one is relatively straightforward. The purpose of Section 179 is to give businesses the ability to fully deduct qualified purchases in the year they make them. So instead of needing to spread this deduction out over several years of depreciation, businesses can reap these benefits all at once.

 

Is Section 179 a Loophole?

The answer to that question is no. However, having that association with it is completely understandable. When the US government created this section of the tax code, they did so to incentivize businesses to invest in themselves by purchasing the equipment they need to thrive and grow. Where the “loophole” aspect of Section 179 comes into the picture is there was a time when plenty of businesses used this section of the tax code to write-off the purchase of vehicles which qualified at the time.

Because that specific aspect of Section 179 did start to be viewed as a widespread loophole, the current limits on business vehicles have been significantly reduced from where they were. The good news is the rest of Section 179 is still very useful for small businesses (as well as larger ones).

 

The Deduction Limit, Spending Cap and Bonus Depreciation for 2016

The deduction limit for the twelve months of 2016 is half a million dollars. That deduction applies to both used and new equipment, along with off-the-shelf software. In terms of what qualifies equipment for this deduction, the main criteria the IRS follows is it must be used for business purposes more than 50% of the time.

The other notable aspect of Section 179 for 2016 is the spending cap. The amount for this year is two million dollars. In the event a small (or larger) business manages to exceed that threshold, they can still take advantage of bonus depreciation. This year’s bonus depreciation is set at fifty percent.

 

Are Vehicles Still Eligible?

Yes, there are still some benefits available for business vehicles. The summary is certain passenger vehicles have a total depreciation deduction limitation of $11,060, while other vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes qualify for a full Section 179 deduction. If you have specific questions about this aspect of Section 179 or other business tax issues, contact us for a free consultation.