Paying For College May Now Be Less Taxing

by NFS | Feb 3, 2014 | Archives

Education Tax Rules

Parents facing college expenses have several provisions in the tax law to consider. The benefits don’t apply to all, but there is something of interest for many families.

Tax credits

The American Opportunity Tax Credit (formerly The Hope Credit) is available for certain tuition and fees, and it allows you to reduce taxes annually up to $2,500 per student for four years of college. The credit is equal to 100% of the first $2,000 of qualified expenses and 25% of the next $2,000, per student.

The Lifetime Learning Credit covers any year of post-secondary education, with a maximum credit of $2,000, no matter how many students in the family are eligible.

Both the American Opportunity Tax Credit and lifetime learning credits phase out for taxpayers with higher incomes.

Other Education Tax Incentives

Education savings accounts. You may establish an education savings account (previously called an education IRA) with a nondeductible contribution for any child under 18. The annual contribution limit is $2,000. Funds can accumulate and be paid out tax-free for qualified college expenses, including tuition, fees, books, supplies, equipment, and certain room and board costs. The funds can also be used to pay for elementary and secondary (K-12) school expenses at public, private, or religious schools. Eligibility for an education savings account starts phasing out at $95,000 of AGI for single taxpayers and $190,000 for married folks.

Individual retirement accounts (IRAs). Existing IRAs can also be a source of college funds. You may make withdrawals before age 59½ without penalty for amounts paid for college or graduate school tuition, fees, books, room and board, supplies, and equipment.

Education savings bonds. Interest on Series EE and Series I bonds issued after 1989 is nontaxable when used to pay tuition and fees for you or your dependents. This tax break begins to phase out once income reaches certain levels.

Section 529 plans allow individuals to set up an account on behalf of someone else (say a child or grandchild) that can be used to pay college expenses. There are two types of plans:

Prepaid tuition plans are designed to hedge against inflation. You can purchase tuition credits, at today’s rates, that your child can redeem when he or she attends one of the plan’s eligible colleges or universities. Both state and private institutions can offer prepaid tuition programs. Using tuition credits from these programs is tax-free.

College savings plans are state-sponsored plans that allow you to build a fund to pay for your child’s college education. Your contributions are not tax-deductible, but once in the plan, your money grows tax-free. Provided the funds are used to pay for qualified college expenses, withdrawals are tax-free. Qualified expenses include tuition, fees, books, supplies, and certain room and board costs. Private institutions are not allowed to set up college savings accounts.

Student loan interest deduction. Interest on certain student loans can be deducted whether or not you itemize your deductions. The maximum deduction is $2,500 per year over the loan repayment period and income phase out rules apply here as well.

Other tax benefits. Most scholarships remain tax-free, nontaxable employer-paid tuition may be available, and education expenses related to your job still may be deductible.

When you start examining your situation, remember that many of these provisions are designed so that you can’t benefit from more than one in any given year. We can help guide you through the maze and help ensure that you receive the maximum possible benefit.

Official Start of Tax Season is Today – January 31st

by NFS | Jan 31, 2014 | Archives

Today marks the delayed official day the IRS will start to accept paper or electronically filed tax returns. The delayed start this year is due to the 16-day U.S. Government shutdown in October 2013.

The April 15th tax deadline is set by statute and will remain in place, although taxpayers can request an automatic six-month extension to file their tax return. If you think you may need an extension, let us know and we can take care of that for you free of charge.

If you are looking for a discount on your professionally prepared tax return and you are a first time client of NFS, here is a $30 Off Coupon.

First Time NFS Client Discount

Tax Changes for 2014: A Checklist

Individuals

For 2014, more than 40 tax provisions are affected by inflation adjustments, including personal exemptions, AMT exemption amounts, and foreign earned income exclusion, as well as most retirement contribution limits.

For 2014, the tax rate structure, which ranges from 10 to 39.6 percent, remains the same as in 2013, but tax-bracket thresholds increase for each filing status. Standard deductions and the personal exemption have also been adjusted upward to reflect inflation. For details see the article, “Tax Brackets, Deductions, and Exemptions for 2014,” below.

Alternative Minimum Tax (AMT)

Exemption amounts for the AMT, which was made permanent by the American Taxpayer Relief Act (ATRA) are indexed for inflation and allow the use of nonrefundable personal credits against the AMT. For 2014, the exemption amounts are $52,800 for individuals ($51,900 in 2013) and $82,100 for married couples filing jointly ($80,800 in 2013).

“Kiddie Tax” 

For taxable years beginning in 2014, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $1,000 (same as 2013). The same $1,000 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax”. For example, one of the requirements for the parental election is that a child’s gross income for 2014 must be more than $1,000 but less than $10,000.

For 2014, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to “kiddie tax” is $2,000.

Health Savings Accounts (HSAs) 

Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.

A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.

For calendar year 2014, a qualifying HDHP must have a deductible of at least $1,250 for self-only coverage or $2,500 for family coverage (unchanged from 2013) and must limit annual out-of-pocket expenses of the beneficiary to $6,350 for self-only coverage (up $100 from 2013) and $12,700 for family coverage (up $200 from 2013).

Medical Savings Accounts (MSAs) 

There are two types of Medical Savings Accounts (MSAs): the Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high deductible health plan (HDHP).

Self-only coverage. For taxable years beginning in 2014, the term “high deductible health plan” means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,200 (up $50 from 2013) and not more than $3,250 (up $50 from 2013), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,350 (up $50 from 2013).

Family coverage. For taxable years beginning in 2014, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,350 (up $50 from 2013) and not more than $6,550 (up $100 from 2013), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,000 (up $150 from 2013).

AGI Limit for Deductible Medical Expenses

In 2014, the deduction threshold for deductible medical expenses remains at 10 percent (same as 2013, but up from 7.5 percent in 2012) of adjusted gross income (AGI); however, if either you or your spouse were age 65 or older as of December 31, 2013, the new 10 percent of AGI threshold will not take effect until 2017. In other words, the 7.5 percent threshold continues to apply for tax years 2013 to 2016 for these individuals. In addition, if you or your spouse turns age 65 in 2014, 2015, or 2016, the 7.5 percent of AGI threshold applies for that year through 2016 as well. Starting in 2017, the 10 percent of AGI threshold applies to everyone.

Eligible Long-Term Care Premiums 

Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or younger at the end of 2014, the limitation is $370. Persons more than 40 but not more than 50 can deduct $700. Those more than 50 but not more than 60 can deduct $1,400, while individuals more than 60 but not more than 70 can deduct $3,720. The maximum deduction $4,660 and applies to anyone more than 70 years of age.

Medicare Taxes 

The additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly), which became effective last year, in 2013, remains in effect for 2014, as does the Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts and self-employed individuals are all liable for the new tax.

Foreign Earned Income Exclusion 

For 2014, the foreign earned income exclusion amount is $99,200, up from $97,600 in 2013.

Long-Term Capital Gains and Dividends

In 2014 tax rates on capital gains and dividends remain the same as 2013 rates; however threshold amounts are indexed for inflation. As such, for taxpayers in the lower tax brackets (10 and 15 percent), the rate remains 0 percent. For taxpayers in the four middle tax brackets, 25, 28, 33, and 35 percent, the rate is 15 percent. For an individual taxpayer in the highest tax bracket, 39.6 percent, whose income is at or above $406,750 ($457,600 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.

Pease and PEP (Personal Exemption Phaseout) 

Both Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) have been permanently extended (and indexed to inflation) for taxable years beginning after December 31, 2012, and in 2014, affect taxpayers with income at or above $254,200 for single filers and $305,050 for married filing jointly.

Estate and Gift Taxes 

For an estate of any decedent during calendar year 2014, the basic exclusion amount is $5,340,000, indexed for inflation (up from $5,250,000 2013). The maximum tax rate remains at 40 percent. The annual exclusion for gifts also remains at $14,000.

Individuals – Tax Credits

Adoption Credit 

In 2014, a non-refundable (only those individuals with tax liability will benefit) credit of up to $13,190 is available for qualified adoption expenses for each eligible child.

Earned Income Tax Credit 

For tax year 2014, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $6,143, up from $6,044 in 2013. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Child Tax Credit 

For tax year 2014, the child tax credit is $1,000 per child.

Child and Dependent Care Credit

If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2014. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Individuals – Education

American Opportunity Tax Credit and Lifetime Learning Credits 

The American Opportunity Tax Credit (formerly Hope Scholarship Credit) was extended to the end of 2017 by ATRA. The maximum credit is $2,500 per student. The Lifetime Learning Credit remains at $2,000 per return.

Interest on Educational Loans 

In 2014 (as in 2013), the $2,500 maximum deduction for interest paid on student loans is no longer limited to interest paid during the first 60 months of repayment. The deduction is phased out for higher-income taxpayers with modified AGI of more than $65,000 ($130,000 joint filers).

Individuals – Retirement Contribution Limits 

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $17,500. Contribution limits for SIMPLE plans remains unchanged at $12,000. The maximum compensation used to determine contributions increases to $260,000 (up $5,000 from 2013).

Income Phase-out Ranges 

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified AGI between $60,000 and $70,000, up from $59,000 and $69,000 in 2013.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range is $96,000 to $116,000, up from $95,000 to $115,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $181,000 and $191,000, up from $178,000 and $188,000.

The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013. For singles and heads of household, the income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000. For a married individual filing a separate return who is covered by a retirement plan, the phase-out range remains $0 to $10,000.

Saver’s Credit 

In 2014, the AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low and moderate income workers is $60,000 for married couples filing jointly, up from $59,000 in 2013; $45,000 for heads of household, up from $44,250; and $30,000 for married individuals filing separately and for singles, up from $29,500.

Businesses

Standard Mileage Rates 

The rate for business miles driven is 56 cents per mile for 2014, down from 56.5 cents per mile in 2013.

Section 179 Expensing 

For 2014 the maximum Section 179 expense deduction for equipment purchases decreases to $25,000 of the first $200,000 of business property placed in service during 2014. The bonus depreciation of 50 percent is gone, as is the accelerated deduction, where businesses can expense the entire cost of qualified real property in the year of purchase.

Transportation Fringe Benefits 

If you provide transportation fringe benefits to your employees, in 2014 the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $130 down from $245 in 2013. The monthly limitation for qualified parking is $250.

While this checklist outlines important tax changes for 2014, additional changes in tax law are more than likely to arise during the year ahead.

Don’t hesitate to call us if you want to get an early start on tax planning for 2014. We’re here to help!

Too Late for 2013 Tax Planning? Guess again.

by NFS | Jan 3, 2014 | Archives

2013 is done, so 2013 tax planning is done too, right? Guess again. Although it’s true that most tax planning

strategies are limited after December 31st, there is still a lot you can do to make the tax-filing season cheaper and easier.

Maximize Your Retirement Contributions

If you haven’t already funded your retirement account for 2013, you still have time. Contributions to a Traditional IRA (whether deductible or not) and to a Roth IRA are available until April 15th, 2014. If you are self employed and have a Keogh or SEP-IRA, you have until October 15th, 2014, if you submit an extension of time to file your tax return. Not only will making a deductible contribution lower your tax bill, but your investment will compound tax-deferred. There are specific requirements and limits for each type of account so check with a qualified tax advisor on your specific situation.

Estimated Tax Payments

If you don’t pay enough to the IRS during the year, you may be looking at a hefty tax bill come April. It is possible that you might even owe penalties and interest on top of the tax.  You could avoid any 2013 fourth quarter penalties on underpayment of tax if you submit a payment by January 15th 2014. Try not to over pay the tax however, because the IRS does not pay you any interest on the borrowed money called your refund. It is your money so plan accordingly.

Organization of Your Records

Having your records organized may not save tax dollars, but will make your tax season less stressful. Start
by keeping your prior year returns and tax documents in the same place. Collect all of your receipts and documents that may have piled up during the year (hopefully you already have a folder or file called “Taxes” to get you started). When your W2s, 1099s or other tax documents start arriving in the mail, put them all in the same folder and group them together in like categories.  When beginning to prepare your return, work off a checklist or worksheet so you don’t overlook anything.

Take Every Deduction You Are Entitled To

Often times, taxpayers overlook deductions or decide not to take certain deductions because they feel too they are being too aggressive. In order to minimize the amount of tax liability, take every deduction you are entitled to. If your qualified itemized deductions exceed your standard deduction, file with the higher amount. Some well known items that you can itemize are home mortgage interest, real estate taxes and charitable deductions. Other lesser known itemized deductions that you may be entitled to include job hunting expenses, unreimbursed employee expenses, and out of pocket medical expenses. If you are self employed, make sure you write off all of your expenses and be prepared to back these with receipts. One of the items self-employed individuals may be eligible for is the Office-In-Home Deduction. If you conduct business exclusively out of your home office, you may be eligible.

File & Pay On-Time

If you can’t finish your return on time, make sure you file Form 4868 by April 15th, 2014. You will get automatic six-month extension of the filing deadline until October 15th, 2014. On the form, you need to make a reasonable estimate of your tax liability for 2013 and pay any balance due with your request. Requesting an extension in a timely manner is especially important if you end up owing tax to the IRS. If you file and pay late, the IRS can slap you with a late-filing penalty of 4.5 percent per month of the tax owed and a late-payment penalty of 0.5 percent a month of the tax due. The maximum late filing penalty is 22.5 percent and the penalty tops out at 25 percent. By filing Form 4868, you stop the clock running on the costly late-filing penalty.

Seek Help, If You Need It

Low cost, affordable options to prepare and file your returns exist. If you are comfortable doing your own return, go for it. If you become uncomfortable or get in a jam, call our office at 800-560-4637 for added confidence and peace of mind.

Happy New Year From NFS

by NFS | Jan 1, 2014 | Archives

IRS Sets the Date: Tax Season Starts January 31st

by NFS | Dec 19, 2013 | Archives

WASHINGTON — The Internal Revenue Service today announced plans to open the 2014 filing season on Jan. 31 and encouraged taxpayers to use e-file or Free File as the fastest way to receive refunds.

The new opening date for individuals to file their 2013 tax returns will allow the IRS adequate time to program and test its tax processing systems. The annual process for updating IRS systems saw significant delays in October following the 16-day federal government closure.

“Our teams have been working hard throughout the fall to prepare for the upcoming tax season,” IRS Acting Commissioner Danny Werfel said. “The late January opening gives us enough time to get things right with our programming, testing and systems validation. It’s a complex process, and our bottom-line goal is to provide a smooth filing and refund process for the nation’s taxpayers.”

The government closure meant the IRS had to change the original opening date from Jan. 21 to Jan. 31, 2014. The 2014 date is one day later than the 2013 filing season opening, which started on Jan. 30, 2013 following January tax law changes made by Congress on Jan. 1 under the American Taxpayer Relief Act (ATRA). The extensive set of ATRA tax changes affected many 2012 tax returns, which led to the late January opening.

The IRS noted that several options are available to help taxpayers prepare for the 2014 tax season and get their refunds as easily as possible. New year-end tax planning information has been added to IRS.gov this week.

In addition, many software companies are expected to begin accepting tax returns in January and hold those returns until the IRS systems open on Jan. 31. More details will be available in January.

The IRS cautioned that it will not process any tax returns before Jan. 31, so there is no advantage to filing on paper before the opening date. Taxpayers will receive their tax refunds much faster by using e-file or Free File with the direct deposit option.

The April 15 tax deadline is set by statute and will remain in place. However, the IRS reminds taxpayers that anyone can request an automatic six-month extension to file their tax return. The request is easily done with Form 4868, which can be filed electronically or on paper.

IRS systems, applications and databases must be updated annually to reflect tax law updates, business process changes and programming updates in time for the start of the filing season.

The October closure came during the peak period for preparing IRS systems for the 2014 filing season. Programming, testing and deployment of more than 50 IRS systems is needed to handle processing of nearly 150 million tax returns. Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year.

About 90 percent of IRS operations were closed during the shutdown, with some major work streams closed entirely during this period, putting the IRS nearly three weeks behind its tight timetable for being ready to start the 2014 filing season. There are additional training, programming and testing demands on IRS systems this year in order to provide additional refund fraud and identity theft detection and prevention.

Three Year-End Tax Tips to Help You Save

by NFS | Dec 17, 2013 | Archives

Although the year is almost over, you still have time to take steps that can lower your 2013 taxes. Now is a good time to prepare for the upcoming tax filing season. Taking these steps can help you save time and tax dollars. They can also help you save for retirement. Here are three year-end tips from the IRS for you to consider:

1. Start a filing system.  If you don’t have a filing system for your tax records, you should start one. It can be as simple as saving receipts in a shoe box, or more complex like creating folders or spreadsheets. It’s always a good idea to save tax-related receipts and records. Keeping good records now will save time and help you file a complete and accurate tax return next year.
2. Make Charitable Contributions.  If you plan to give to charity, consider donating before the year ends. That way you can claim your contribution as an itemized deduction for 2013. This includes donations you charge to a credit card by Dec. 31, even if you don’t pay the bill until 2014. A gift by check also counts for 2013 as long as you mail it in December. Remember that you must give to a qualified charity to claim a tax deduction. Use the IRS Select Check tool at IRS.gov to see if an organization is qualified. Make sure to save your receipts. You must have a written record for all donations of money in order to claim a deduction. Special rules apply to several types of property, including clothing or household items, cars and boats. For more about these rules see Publication 526, Charitable Contributions. If you are age 70½ or over, the qualified charitable distribution allows you to make tax-free transfers from your IRAs to charity. You can give up to $100,000 per year from your IRA to an eligible charity, and exclude the amount from gross income. You can use the excluded amount to satisfy any required minimum distributions that you must otherwise receive from your IRAs in 2013. This benefit is available even if you do not itemize deductions. This special provision is set to expire at the end of 2013. See Publication 590, Individual Retirement Arrangements (IRAs), for more information.
3. Contribute to Retirement Accounts.  You need to contribute to your 401(k) or similar retirement plan by Dec. 31 to count for 2013. On the other hand, you have until April 15, 2014, to set up a new IRA or add money to an existing IRA and still have it count for 2013. The Saver’s Credit, also known as the Retirement Savings Contribution Credit, helps low- and moderate-income workers in two ways. It helps people save for retirement and earn a special tax credit. Eligible workers who contribute to IRAs, 401(k)s or similar workplace retirement plans can get a tax credit on their federal tax return. The maximum credit is up to $1,000, $2,000 for married couples. Other deductions and credits may reduce or eliminate the amount you can claim.

For more help on all these topics, please give us a call 800-560-4637.