Education

6 FAQs About 529 College Savings Plans

College is a large expense and one worth planning for, especially if you want your future college graduate to start their lives with minimal debt. One common way to prepare for such an expense is to open a 529 college savings plan.

Photo by Ruijia Wang on Unsplash

Photo by Ruijia Wang on Unsplash

What is a 529 plan?

College savings 529 plans are state-sponsored savings accounts that offer both tax and financial aid benefits.

What states run a 529 program?  

Almost every state has a 529 program, each with different perks and benefits. You can pick based on perks and you don’t need to live in the state you opened the account in.

You can look at 529 plan options using this tool from SavingforCollege.com.

What are the two types of college 529 plans?

There are two types of 529 plans, they are:

  • College savings plans – This plan is similar to a Roth 401k or Roth IRA by allowing you to contribute after-tax income in the form of mutual funds and other types of investments. There are a number of investment options to choose from and the 529 account will go up and down and value according to those investment choices. The money is this account is available for tuition, books, and often housing.

  • College prepaid tuition-  This plan can be used to pre-pay all or part of the costs of an in-state public college education. Sometimes, they can be converted for use at private or out-of-state colleges.

What are the perks of using a 529 savings plan?

Each state provides slightly different incentives for its 529 programs. But some of the overall benefits include:

  • Large income tax breaks (for federal and often state taxes)

  • The donor stays in control of the account until its use

  • They’re low maintenance

When can you start them?

You can start one of these savings plans at any time. Most 529 programs are “set it and forget it” meaning the investments come straight out of your paycheck or bank account.

Where can I learn more about college 529 plans?

There are a lot of online resources for comparing and ranking different 529 programs. You can reference one of these, or reach out to your friendly neighborhood tax professionals. We can help you select the best option for you.

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3 Essential Tips for Financial Planning When You Have a Disability

Having a disability is not quite as rare as many people think. In fact, about 14 percent of adults around the world have a disability of some kind. This includes people who have a physical, mental, intellectual, or sensory limitation at a mild, severe, or moderate level. Also, these disabilities could have happened at birth, in old age, or anywhere in between.

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One thing that remains consistent across all forms of disability, however, is that life generally costs more money for those who have them. Normal expenses such as medical care and food, as well as additional costs such as modified housing and assistive devices and technology, can put a major burden on those with disabilities. That’s why it’s essential to have a financial plan in place. If you have a disability, these three tips will help you prepare and form the financial skills it takes to live your best life, both now and in the future.

Consider Life Insurance

One of the first things you should do when planning your finances is to look into life insurance. If you get a policy that benefits your current situation, it could provide significantly for your family if you were to pass away unexpectedly. And life insurance can help cover things like medical expenses, funeral expenses, and lost income. Moreover, shopping for life insurance is fairly straightforward nowadays, as you can easily purchase it online and use online calculators to figure out the coverage you need.

Set a Budget

Much of your financial planning comes down to making a budget. Not only will your budget serve as a guideline for your spending and saving, the process of making a budget will teach you a lot about your financial situation and the steps you can take to grow. If you’re on a fixed income, start with how much you bring in each month. If you are able to work or already have a job, where does that put your monthly income?

Once you factor in your income, write down all of your expenses; include everything you can think of. This might include normal monthly expenses such as your mortgage payment, home and auto insurance, utilities, food, entertainment, gas, etc. Also, consider your medical expenses: How much do you spend on medical care, assistive devices, or any other medical-related expenses? Furthermore, include any credit card debt you want to pay off.

Once you get these basic costs on paper, see where you stand concerning your income and expenses. Then you can determine what you can cut (entertainment, miscellaneous items, etc,) if necessary. Also, be sure to research all your options when it comes to financial assistance.

Build an Emergency Fund

As it is with anyone, saving money is important when you have a disability. Once you figure out your budget, determine how much you can put away in savings. Building an emergency fund will create a safety net in the event that something unexpected happens — whether it’s a medical incident, major home or car repair, or any other kind of sudden expense. Decide on a set amount to put into a cash jar or savings account, and stick to it as close as you can.

There may be many expenses that come with a disability, but that doesn’t mean you can’t navigate them and make a plan that meets your needs and sets you up to be cared for later in life. Work through your finances and set a budget to guide you through your spending and saving. Find the best life insurance plan for you and your family, and start building an emergency fund today. Being financially prepared will help you overcome a lot of challenges and put you in a better position to live a fulfilling life.

 Written by Ed Carter

Tax lesson for teachers: Educator expenses can be written off

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

tax deductions for teachers

Teachers on average spend $530 of their own money during the school year to pay for supplies, snacks for students and other classroom items.

Teachers and other educators can get a tax deduction of up to $250 for some of those costs as well as continuing education expenses.

Even better, they don’t have to itemize to get the tax break. Educator expenses are one of the so-called above-the-line deductions claimed directly on a Form 1040 or via tax software.

Educator expenses deduction enhanced

Congress made the tax break for educators a permanent part of the tax code in 2015.

Lawmakers also indexed the $250 maximum deduction amount for inflation. It didn’t change for the 2016 tax year, because of low inflation, but it could increase in future years.

What items are deductible?

Besides teachers, counselors, principals and aides can take the deduction if, for the tax year, they were employed at a state-approved public or private school system from kindergarten through grade 12, and worked at least 900 hours during the school year.

Educators can write off unreimbursed costs for:

  • Books
  • Supplies
  • Computer and other equipment (including software and services)
  • Supplementary materials used in the classroom
  • Professional development programs

The IRS also applies its “ordinary and necessary” rule here. An item purchased for your classroom must be considered ordinary:  something that is common and accepted in the education profession.

It also must be necessary: defined as helpful and appropriate, though maybe not required.

So buying a recording of “Death of a Salesman” to help drive home Arthur Miller’s points to your students would likely meet tax muster. But purchasing a new HD television, instead of watching on your school’s working-but-old set, may raise some IRS eyebrows.

Couples who share education careers could get a double break if they file jointly. However, each spouse is limited to $250 of qualified expenses.

What about home schooling? Sorry, but the tax law specifically states that costs for this type of instruction don’t count toward the educator expenses deduction.

Circumstances could limit expenses

In addition to the eligibility requirements on expenses, the IRS has set some other restrictions on what’s deductible.

The tax agency says when an educator uses any tax-favored funds to pay for his or her own schooling, those amounts must be subtracted from the total the teacher claims under the educator expenses deduction.

Take for example Joe Jones, a high school English teacher who is working toward his master’s degree in literature during school breaks. He cashed in savings bonds to pay his tuition and excluded the bonds’ $150 interest from tax. He also spent $200 for books on Shakespeare to distribute to his 11th-grade students. He must subtract the $150 in tax-free interest from the $200 for the books, leaving him only $50 to claim under the educator expenses deduction.

The same rule applies to nontaxable earnings a teacher gets from qualified state tuition programs or tax-free withdrawals from a Coverdell education savings account.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Updating Beneficiary Designations & Benefits of Health Savings Accounts (HSA)

The importance of updating beneficiary designations

Health Savings AccountsMost of us have more than enough to do. We’re on the go from early in the morning until well into the evening — six or seven days a week. Thus, it’s no surprise that we may let some important things slide. We know we need to get to them, but it seems like they can just as easily wait until tomorrow, the next day, or whenever.

A U.S. Supreme Court decision reminds us that sometimes “whenever” never gets here and the results can be tragic. The case involved a $400,000 employer-sponsored retirement account, owned by William, who had named his wife, Liv, as his beneficiary in 1974 shortly after they married. The couple divorced 20 years later. As part of the divorce decree, Liv waived her rights to benefits under William’s employer-sponsored retirement plans. However, William never got around to changing his beneficiary designation form with his employer.

When William died, Liv was still listed as his beneficiary. So, the plan paid the $400,000 to Liv. William’s estate sued the plan, saying that because of Liv’s waiver in the divorce decree, the funds should have been paid to the estate. The Court disagreed, ruling that the plan documents (which called for the beneficiary to be designated and changed in a specific way) trumped the divorce decree. William’s designation of Liv as his beneficiary was done in the way the plan required; Liv’s waiver was not. Thus, the plan rightfully paid $400,000 to Liv.

The tragic outcome of this case was largely controlled by its unique facts. If the facts had been slightly different (such as the plan allowing a beneficiary to be designated on a document other than the plan’s beneficiary form), the outcome could have been quite different and much less tragic. However, it still would have taken a lot of effort and expense to get there. This leads us to a couple of important points.

If you want to change the beneficiary for a life insurance policy, retirement plan, IRA, or other benefit, use the plan’s official beneficiary form rather than depending on an indirect method, such as a will or divorce decree.

It’s important to keep your beneficiary designations up to date. Whether it is because of divorce or some other life-changing event, beneficiary designations made years ago can easily become outdated.

One final thought regarding beneficiary designations: While you’re verifying that all of your beneficiary designations are current, make sure you’ve also designated secondary beneficiaries where appropriate. This is especially important with assets such as IRAs, where naming both a primary and secondary beneficiary can potentially allow payouts from the account to be stretched out over a longer period and maximize the time available for the tax deferral benefits to accrue.

The many benefits of a Health Savings Account (HSA)

A Health Savings Account (HSA) represents an opportunity for eligible individuals to lower their out-of-pocket health care costs and federal tax bill. Since most of us would like to take advantage of every available tax break, now might be a good time to consider an HSA, if eligible.

Herman & Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

An HSA operates somewhat like a Flexible Spending Account (FSA) that employers offer to their eligible employees. An FSA permits eligible employees to defer a portion of their pay, on a pretax basis, which is used later to reimburse out-of-pocket medical expenses. However, unlike an FSA, whatever remains in the HSA at year end can be carried over to the next year and beyond. In addition, there are no income phaseout rules, so HSAs are available to high-earners and low-earners alike.

Naturally, there are a few requirements for obtaining the benefits of an HSA. The most significant requirement is that an HSA is only available to an individual who carries health insurance coverage with a relatively high annual deductible. For 2015, the individual’s health insurance coverage must come with at least a $1,300 deductible for single coverage or $2,600 for family coverage. For many self-employed individuals, small business owners, and employees of small and large companies alike, these thresholds won’t be a problem. In addition, it’s okay if the insurance plan doesn’t impose any deductible for preventive care (such as annual checkups). Other requirements for setting up an HSA are that an individual can’t be eligible for Medicare benefits or claimed as a dependent on another person’s tax return.

Individuals who meet these requirements can make tax-deductible HSA contributions in 2015 of up to $3,350 for single coverage or $6,650 for family coverage. The contribution for a particular tax year can be made as late as April 15 of the following year. The deduction is claimed in arriving at adjusted gross income (the number at the bottom of page 1 on your return). Thus, eligible individuals can benefit whether they itemize or not. Unfortunately, however, the deduction doesn’t reduce a self-employed person’s self-employment tax bill.

When an employer contributes to an employee’s HSA, the contributions are exempt from federal income, Social Security, Medicare, and unemployment taxes.

An account beneficiary who is age 55 or older by the end of the tax year for which the HSA contribution is made may make a larger deductible (or excludible) contribution. Specifically, the annual tax-deductible contribution limit is increased by $1,000.

An HSA can generally be set up at a bank, insurance company, or other institution the IRS deems suitable. The HSA must be established exclusively for the purpose of paying the account beneficiary’s qualified medical expenses. These include uninsured medical costs incurred for the account beneficiary, spouse, and dependents. However, for HSA purposes, health insurance premiums don’t qualify.

College Students: The Gray Area of Exemptions

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!  

There’s still time to take advantage of last-minute, tax-saving moves for dependency exemptions. For 2014, there are bigger dependency exemptions, as well as rules that, in some cases, are dauntingly complex. Read the below article by Julian Block from Accounting Web!

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The 2014 exemption is worth $3,950, up from the 2013 figure of $3,900. But you can’t take an exemption for an individual who is eligible to be claimed as a dependent on someone else’s return. An example: No exemption for a child on the child’s return when he or she can be claimed on the parent’s return.

The basic rules haven’t changed: To claim a 2014 exemption for a dependent, you must furnish more than half of the dependent’s total support for the year or, under a multiple support agreement, more than 10 percent. Generally, the exemption is lost if a dependent’s reportable income for 2014 surpasses $3,950. However, only income from taxable sources counts. Funds received by a dependent from tax-exempt sources like Social Security benefits, inheritances and gifts don’t count.

But there’s a break: Assuming you meet the support test, the tax code sets no limit on the amount of a dependent’s reportable income when your child is either (1) under age 19 at the close of 2014 or (2) a full-time college student who spends at least five months of the year in school and won’t reach the age of 24 by the close of 2014. Note, though, that the income cap does apply when your college-attending child has income above $3,950 and will be 24 by 2014’s close.

Some strategies. Are you supporting a son or daughter in college? In some cases, you need to remind your child to bank part of his or her earnings or to spend some money on nonsupport items; meanwhile, you take care of support items like food, lodgings, clothing, education, medical and dental care, recreation, transportation and similar necessities. Why? Because that maneuver might enable you to pass the support test and get the exemption for 2014.

Count as support the “fair rental value” of the lodgings you provide for a child living with you; add a reasonable allowance for use of telephone, electricity, furnishings, appliances and the like. “Fair rental value,” says the IRS, is the amount you could reasonably expect to receive from a stranger for the same kind of lodgings, not the rent or real estate taxes, mortgage interest, an so on, paid by you that’s attributable to the space involved. Also include the value of a year-round room you maintain for an away-at-college child and the food you provide while he or she is at home during a school recess.

Don’t count a scholarship in calculating total support. It makes no difference that your child actually uses the award for education and other support items. As for GI Bill benefits and the proceeds from college loans secured by the student, they are support the child provides. But any loan for a child’s education secured by you is support you furnish.

The IRS strictly defines “student.” Your son or daughter must be enrolled on a full-time basis for a minimum of five months in the calendar year in an educational institution with a regular faculty, an established curriculum, and an organized student body.

The IRS authorizes no exceptions to the five-month rule. But your child doesn’t have to be enrolled for five consecutive months or even five full months.

An example: Clarice Lecter registers for a full-time course load in January, with classes to run from February through May. With that time span, Clarice satisfies the time requirement, provided she completes the semester.

The IRS allows her to include some night attendance as part of a full-time course of study. But the agency cautions that if Clarice attends exclusively at night, she must enroll for the number of hours or classes that’s considered full-time attendance.

Just how inflexible the agency is on the time stipulation is underscored by an IRS ruling that was sought by the parents of a 19-year-old student who dropped out of school after four months following hospitalization for a nervous breakdown. He was unable to return to school for the remainder of the year. The verdict: No exception from the five-month requirement, regardless of the son’s reason for leaving school. Consequently, the parents couldn’t claim an exemption for him.

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

 

Advice to Accounting Students: Words of Wisdom from a CPA

We recently had the opportunity to share our best advice for aspiring CPAs in a guest blog with “The Finance Writer,” Brian Huber.

advice for students in finance from westchester accountant

Get started on the path to success as a finance student with these tips!

With a new year just beginning, we think about how this time of year somehow seems to breathe new life into people, shining a refreshing light on the goals and dreams that await us. Whether you’re a freshman or senior accounting student, taking these tips with you as you enter the brand-new year is one sure way to setting yourself up for success as a future CPA. Read on here  to discover our recommended best practices for finance students!

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Armonk NY, Bedford NY, Chappaqua NY, Harrison NY, Mamaroneck NY, Scarsdale NY, Greenwich CT and beyond.

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Education Expenses FAQs

Scarsdale accountant Paul Herman has all the answers to your personal finance questions! The following are frequently asked questions our Westchester CPA firm receives regarding education expenses. Get to know these important financial tips to save as much as possible!
 Are there available tax breaks for my children’s education?

There are many different ways to use tax breaks for the higher education of your children. Be aware that you can only receive one type of relief for one item. It is best to consult with a professional to determine which would be the most advantageous.

▼ What is the education tax credit?

You must make a choice between two types of tax education credit.

▼ What is a Coverdell (Section 530)?

An education IRA is different than a standard IRA in these ways:

  • Withdrawals aren’t taxed if used for qualified education expenses.
  • Contributions can be made only up until the point that the client reaches 18, and all funds must be distributed by the time that they are 30.
  • Contributions are not tax deductible
 How can I best use the Coverdell (section 530)?

It is possible to have various 530 accounts for the same student, each opened by different family members or friends. There is no limit to the number of people that can open an account like this for a child.

Education expenses from scarsdale cpa

Get to know the expenses that come with education to save as much as possible!

The account can be transferred to another family member at any time. If the original child decides against going to college or is granted a scholarship, another family member can still utilize the money that has been saved.

▼ What is a qualified tuition program?

The Section 529 is a college savings program available in most states. Money is invested to cover the costs of future education. These investments grow tax free and the distributions may also be tax-free.

▼ What differentiates the Coverdell Section 530 and the Section 529?

  • The Section 529 allows for much larger yearly investments, whereas the Section 530 currently only allows for $2000 annually.
  • The choice of investments in the Section 529 is extremely conservative and limited while the Section 530 allows for many different options.
  • The Section 530 is a nationwide program while the 529 varies from state to state.
  • The Section 530 will let you use its funds for primary and secondary education, while the Section 529 can only be used for secondary.
▼ Can I take money from my traditional or Roth IRA to fund my child’s education?

Yes, you can take distributions from your IRAs for qualifying education expenses without having to pay the 10% additional tax penalty. You may owe income tax on at least part of the amount distributed, but not the additional penalty. The amount of the distribution that is more than the education expense does not qualify for the 10% tax exception.

▼ What tax deductions can be used for college education?

There is a limited deduction allowed for higher education and related expenses. In addition, business expense deductions are allowed, without a dollar limit, for education related to the taxpayer’s business, employment included.

▼ Is student loan interest tax deductible?

In certain instances, yes, although deductions need to adhere to a few guidelines. The deduction is also subject to income phaseouts.

  • The deduction ceiling is $2,500.
  • If you are a dependant, you may not claim the interest deduction.
  • You need to be the person liable for the debt and the loan must be purely for education.
▼ Can I deduct for education that helps at the workplace?

If you are receiving this education to maintain or improve skills at your current job, yes, but not if it is to meet the minimum requirements.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Pound Ridge NY, Scarsdale NY, Rye NY, Mamaroneck NY, Stamford CT and beyond.

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Taxes on College Savings Accounts

Scarsdale accountant Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!

In recent years, parents have lent an ear to a similar tune: Take the reins of any and every type of tax-advantaged savings account in order to save for your children’s enormous college bills. The message has resonated very clear. A majority of families are now saving for college using on average two types of college savings vehicles. Almost 16% of households are using three. College Savings and Taxes Tips from Scarsdale AccountantOften, this mix includes the more traditional accounts, such as Uniform Gifts to Minors Act (UGMA), as well as tax-deferred education programs like 529 Savings Plans and Coverdell Education Savings Accounts (ESAs). Alternatively, other households are investing in a combination of aforementioned tax-advantaged plans, and taxable brokerage accounts.

There is a scary measure to this story: After spending several years trying to decipher UGMAs, ESAs, IRAs, and 529s to figure out the best path, parents face the equally confusing task of determining how to properly utilize these accounts under the tax code when their child is ready for college. Even for those parents with consolidated accounts, determining how to distribute these savings is not cut and dry. The decision could dictate financial aid grants, as well as affect the household’s tax rate.

Aid considerations are a big reason that planners suggest that parents holding traditional custodial accounts like UGMAs deplete those first to pay for initial college costs. The reasoning is that money saved in a custodial account is held in the child’s name to take advantage of his/her lower tax bracket. Furthermore, anything held in a child’s name considered “for college money” as opposed to monies held by parents (35 percent of the student’s assets are considered “tuition eligible” while only 5.6 percent of the parental assets are considered).

This is just one area in which choosing the correct 529 plan can diminish your tax liability. Please contact our Westchester CPA firm with any further questions about your secondary education questions and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Katonah NY, Mount Kisco NY, Rye NY, Bedford NY and beyond.

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Helping Grandchildren with College Costs

Scarsdale accountant Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!

Contributing to a Section 529 college savings program is a great way for grandparents to help their grandchildren pay for college. It is also a great way to remove assets from the grandparent’s estate without paying estate tax.

As an added feature, money in a 529 plan owned by a grandparent is not assessed by the federal financial aid formula when qualifying for student aid. Help Your Grandchildren Through College With These Tips from Scarsdale CPA Paul HermanGrandparents, as well as other taxpayers, have a unique opportunity for gifting to Section 529 college savings plans by contributing up to $70,000 at one time, which currently represents five years of gifts at $14,000 per year. ($14,000 is the annual gift tax exclusion amount for 2013). A married couple who elects gift-splitting can contribute up to double that amount ($140,000 in 2013) to a beneficiary’s 529 plan account(s) with no adverse federal gift tax consequences.

Example: Electing to spread a 529 plan gift over five years.

In 2013, Linda contributes $75,000 to a 529 plan account for the benefit of her grandson, James. She makes no other gifts to James in 2013. Because the gift exceeds the $14,000 annual gift tax exclusion, Linda elects to account for the gift ratably over five years beginning with 2013. Only $70,000 (five times the current annual gift tax exclusion) is eligible for the election; therefore, Linda is treated as having made an excludible gift of $14,000 in years 2013-2017, and a taxable gift of the remainder ($5,000) in 2013.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Larchmont NY, White Plains NY, Bedford NY, Chappaqua NY and beyond.

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Higher Education Costs Continue to Escalate

Scarsdale Tax Preparers at Herman & Company CPA’s have all the answers to your personal finance questions!

The choice to attend college is inevitable for most people. College graduates have been statistically proven to earn substantially more than non-college graduates over the course of their lifetimes and report a greater overall satisfaction with life.

Scarsdale-Accountant-Information-College-Costs

Many more students will be feeling like this with the increasing cost of college.

 

However, it is important to understand that the cost of attending college also continues to increase. The College Board reports that 2012-2013 tuition and fees have risen significantly. Private four-year colleges are up 4.2% (to an average of $29,056) from 2011-2012 for tuition and fees.

 

Public four-year colleges are up 4.8% (to an average of $8,655) from last year for in-state tuition and fees. Public four-year colleges are up 4.2% (to an average of $21,706) from last year for out-of-state tuition and fees. Even public two-year schools are up 5.8% (to an average of $3,131). The report indicates that the subsidies provided to full-time undergraduates at public universities through the combination of grant aid and federal tax benefits averaged $5,750 in 2012-2013.

 

While the cost of attending college may seem daunting, there are plenty of options available for financing your education. Contact us to discuss your options in a free consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Purchase NY, Larchmont NY, Mamaroneck NY, Katonah NY and beyond.

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Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.