Learning Center for Tax and Financial Insights

Article Highlights: Sec. 529 Plans Saving for College Elementary and Secondary School Tuition ABLE Account Transfers Tax reform added some new taxpayer-advantageous changes to college savings plans. These plans are also known as qualified tuition programs (QTPs) or Sec. 529 plans, named after the part of the Internal Revenue Code that established them. Background: Sec. 529 plans allow taxpayers to put away larger amounts of money than other tax-advantaged education savings plans do, limited only by the contributor’s gift tax concerns and the contribution limits of the intended plan. There are no limits on the number of contributors, and there are no income or age limitations. The maximum amount that can be contributed per beneficiary (the intended student) is based on the projected cost of college education and will vary between the states’ plans. Some states base their maximum on the projected costs of an in-state four-year education, but others use the cost of the most expensive schools in the U.S., including graduate studies. Most have limits in excess of $200,000, with some topping $370,000. Generally, additional contributions cannot be made once an account reaches the state’s maximum level, but that doesn’t prevent the account from continuing to grow. Although the plans are authorized by the various states, it is not necessary for the plan to be set up in the future student’s home state, and the student isn’t restricted to using the funds to attend college in their home state or the state where the plan was set up. Some states provide state income tax incentives to the plan’s contributors, such as a state income tax deduction or a tax credit for contributions to the state’s 529 plan. When the time comes for college, the distributions will be part earnings/growth in value and part contributions. The contribution part is never taxable, and the earnings part is tax-free if used to pay for qualified college expenses. In addition to a tax-free distribution from the 529 plan, a taxpayer may claim an education credit – such as the American Opportunity Tax credit, which can be as much as $2,500 – in the same year, provided the same expenses aren’t used for both benefits and the taxpayer’s income level does not phase out the credit. The big advantage of a Sec. 529 plan is tax-free accumulation, so the sooner the account is established and funded, the better. A special provision of Sec. 529 allows those who are concerned with the annual gift tax limitations, currently $15,000, to contribute five years’ worth of contributions ($75,000) up front. These limitations apply to each contributor, but if there are multiple contributors, such as parents, grandparents, aunts and uncles, huge amounts can be contributed up front and provide the greatest long-term growth.

If you’re one of those who gets worked up over filing your tax return, there are specific steps you can take to help ease the struggle and avoid the most common tax issues that are reported each year. Here are the top 12 tax issues, broken down into categories for business owners and individual taxpayers, and how everybody can minimize their impact this year. If you own your own business: 1. Avoid penalties and fines by understanding the rules about deductions. Though tax deductions are a great way to minimize taxes when they’re used the right way, they are frequently abused and overused. The whole point of deductions is to provide businesses the ability to eliminate taxes for items they purchased in the furtherance of their business. Though this includes capital expenditures, client gifts, and business travel, it does not mean that you can include expenses that you incur while talking about your business while you’re on vacation with your family. The IRS has published rules about how much of each expense can be deducted, what type of expense can be deducted and under what circumstance. If you include something that is questionable, you’re going to be asked to justify it, and if you can’t, you’re going to end up worse off than if you hadn’t made an attempt in the first place. 2. Failing to keep track of business expenses that can be deducted. The flip side of people try to game the system by taking expenses to which they’re not entitled is people failing to deduct expenses that they could have because they’re not careful about keeping track. This frequently happens when people don’t have a credit card or account that is dedicated specifically to their business expenses, or when cash is used when traveling or attending business meetings. When you don’t deduct legitimate expenses, you’re cheating yourself out of tax savings, so start keeping all receipts, and talk to a tax professional so that you understand exactly what you can write off, and what you can’t. Individual taxpayer problems: 3. Failing to choose a reputable professional tax preparer. It’s nice of your cousin or next-door neighbor to offer to help, and you might save money by going to a storefront tax preparer that claims they will do the whole job quickly and at a low cost, but an awful lot of taxpayers end up in big trouble as a result of these types of offers. Whether the issue is incompetence or fraud, plenty of people are finding themselves facing penalties and fines or having their refund money stolen as a result of choosing the wrong tax preparer. Do your homework and be willing to spend the money to have your return prepared by a legitimate professional. The things to watch out for include promises of specific refund amounts prior to reviewing your documentation, fees that are based on the amount of your refund, and fly-by-night operations that appear right before tax season and then are gone on April 16th. If you do find a fraudulent tax preparer has victimized you, contact the IRS and attorney right away who will pursue justice and act as your advocate. 4. Filing after the deadline. If you were late in filing last year, you had plenty of company – the IRS reported that almost 45 million taxpayers waited until April. But filing late is a mistake. You are likely to end up paying extra money in fines and penalties, and the later you are, the more likely you are to make errors that will make the entire process take longer and may lead to audits and delays. More importantly, if your lateness is a recurring theme and you still haven’t gotten in paperwork from previous years, it affects the accuracy of your current return and may impact your ability to get any refund or credit that you’re owed. 5. Failure to file a return at all. Plenty of people disregard the tax laws and don’t submit a return. Many of them may not actually owe any taxes, while others reason that since they can’t afford to pay what they owe, they’re better off not submitting anything. This is absolutely wrong. If you are anticipating a problem with submitting the tax that you owe, you can file an installment agreement request that will help you set up a schedule of periodic payments instead of submitting the amount in full at tax time. This is a much better option than not filing, as even though you may have to pay some interest or penalties, they won’t be as punishing as the fees you’ll pay for failure to file a return. You can also choose to file an application for an automatic extension, which gives you more time to get the documentation together, if not the payments. Again, penalties and interest rates are much lower when you avail yourself of this option rather than failing to file. 6. Simple mathematical errors Remember when you were a kid in math class and you’d get a quiz back with mistakes that you’d have spotted if you’d just double checked? Same is true with your taxes. Take the time to go back over your math before you sign on the dotted line or send your return in. It just takes a few extra minutes, and it can save a lot of time and aggravation. Alternatively, use a professional tax preparer and then you don’t have to worry about it at all. 7. Administrative errors Just as you need to check that you’ve done your math computations correctly, you also need to take the time to take a second look at the forms that you’re filling out to make sure that you’ve filled in every box, used all the appropriate forms, and filled in your information correctly. You’d be amazed at how many people transpose the numbers of their social security number or whose handwriting is so bad that it can’t be read by the IRS and gets sent back. Take your time, be careful and do it right to save yourself a headache in the future. A few areas worth double-checking include:

If you are going to owe taxes when you file your federal return, you can avoid or minimize the underpayment penalty with a few simple steps. Learn more below.

If your itemized deductions are slightly less than the standard deduction, bunching your charitable donations may be enough so your itemized deductions will exceed the standard deduction this year.

Article Highlights: Electric Car Credit Solar Electric Credit College Student Supplies Work Equipment Charitable Gifts Employee Gifts Some holiday gifts you provide to members of your family, employees and others may also yield tax benefits. Here are some examples: Electric Car Credit – If you purchase an electric car as a holiday gift for your spouse or even yourself, you will find that most come with a tax credit of up to $7,500. To qualify to claim the credit on your 2018 tax return, the car will have to be “placed in service” by December 31, 2018. So merely ordering the vehicle, even if payment for it is made at the time when the order is placed, won’t be enough – you will need to receive the car and start using it before New Year’s Day. But before you leap, you should know that the credit is non-refundable, meaning it can only offset your actual tax liability and that any excess credit over your tax liability will be lost. There is, however, an exception when the electric vehicle is used partially for business, in which case the portion of the credit allocated to the business use will become a general business credit that is carried back one year and then carried forward. Solar Electric Credit – If you and your spouse or other resident of the home decide to make a gift of a home solar system to each other, you will qualify for a non-refundable tax credit equal to 30% of the cost of the home solar property. If your tax liability is less than the credit, the excess credit can be carried over to a future year. The solar credit is available to all residents of the home, even if they do not have an ownership interest in the home. Example: A mother and son live together in a home owned by the mother. The son purchases a solar system; as a result, the son gets the tax credit, since he resides in the home. Caution: To claim a credit for the system’s costs on your 2018 return, the installation must be completed by December 31, 2018. College Student Supplies – If you have a spouse or child attending college, the costs of certain course materials qualify for the American Opportunity Tax Credit (AOTC) if the course materials are needed as a condition of enrollment and attendance. Thus, for example, if a computer is needed as a condition of enrollment and attendance at the college, the computer’s cost would qualify for the AOTC of the individual who claims the student as a dependent. Other requirements apply to claim the AOTC; check with this office for details. Work Equipment – If your spouse is self-employed and you purchase tools or electronics used in the spouse’s business, the costs of these items will qualify as a business tax deduction on the return for the year the equipment is put into service.

Here’s a handy infographic covering essential deadlines for filing 1099-Misc, 1099-DIV, 1099-INT and 1099-R. You should start preparing your 1099 processing as early as possible. These are hard deadlines. We included state 1099-MISC NEC deadlines as well.(Click the image to increase size)