A couple of clients called me recently about comments made by Rush Limbaugh regarding the proposal put forth by President Obama to eliminate the tax break for 529 plans to help pay for his plan to provide free community college to some people. Since many people are not familiar with 529 plans, I thought I would explain something about how they work.
529 plans got their origin from states that set up prepaid tuition programs to help people pay for the cost of college. They were first recognized by Federal law in 1996. Over the years there have been some expansions in the types of plans offered and who can offer them. Currently there are two types of 529 plans available, prepaid plans and savings plans. Prepaid plans allow the purchase of tuition credits at todays rates to be used in the future. By buying tuition credits with todays dollars, you protect against future tuition increases. Prepaid plans can now be offered by states or by higher education institutions. Savings plans are different in that they rely on the performance of the underlying assets in the plan to determine the growth. Savings plans can only be offered by states.
Currently up to 14,000 per year can be contributed to a 529 plan by an individual taxpayer. There is no federal tax deduction for contributing to a 529 plan, but some states offer deductions for contributing to their state sponsored plans. The federal tax benefit is that the earnings on the plan are not taxed as long as the money is eventually withdrawn to pay qualified education expenses. President Obama is proposing to eliminate this tax deduction and make the earnings taxable upon withdrawal. Of course, his rationale is that this is a tax break for the wealthy and they don’t need it
From my perspective, my tax practice deals with mostly middle class or wealthy individuals and I have found that 529 plans are far more attractive for the middle class than for the wealthy. Paying for college is a much bigger issue for middle class taxpayers than for the wealthy. Middle class taxpayers frequently need to set aside money for many years to accumulate sufficient money to pay for college but most wealthy individuals can simply write a check and don’t have that same concern. Also, there are a limited number of 529 plans and a wealthy investor looking to invest for the long term has numerous other options available with potentially higher rates of return and more attractive investment options.
Another factor to consider is that usually when Uncle Sam offers a carrot there is also a stick attached. In this case, the carrot is tax free growth as long as the money is eventually spent on qualifying educational costs. The stick is that if you withdraw money for any other purpose, the earnings are taxable plus you get to pay a 10% penalty. Each year Uncle Sam takes in revenue from this penalty. For the 2012 tax year, the Statistics of Income information posted on the IRS website shows that over 109 million dollars were received in penalties relating to 529 plans and Coverdell ESA’s. If people stop funding 529 plans, this revenue goes away.
So, what do I think of “free community college”? Well, just remember that free actually means taxpayer funded. Should taxpayers fund free community college? That’s a discussion for another day and one I don’t plan to have on this blog anytime soon. After all, tax season is here and I have to fill out all of those new Obamacare tax forms for all my clients to see if they get to pay a penalty for not having health insurance. For more information on 529 plans, a good resource can be found here.
Tax deduction for Vehicle Donation
/0 Comments/in Blog /by lstaxservices_i8x1k2The IRS has recently issued a new publication for those wishing to get a tax deduction for the donation of a vehicle to charity. It contains useful information for potential donors.
Limbaugh’s comments on Obama’s college proposal
/1 Comment/in Blog /by lstaxservices_i8x1k2Rush listeners called me to get my perspective on paying for free community college. Here’s the view of a tax professional.
529 Plans
/0 Comments/in Blog /by lstaxservices_i8x1k2A couple of clients called me recently about comments made by Rush Limbaugh regarding the proposal put forth by President Obama to eliminate the tax break for 529 plans to help pay for his plan to provide free community college to some people. Since many people are not familiar with 529 plans, I thought I would explain something about how they work.
529 plans got their origin from states that set up prepaid tuition programs to help people pay for the cost of college. They were first recognized by Federal law in 1996. Over the years there have been some expansions in the types of plans offered and who can offer them. Currently there are two types of 529 plans available, prepaid plans and savings plans. Prepaid plans allow the purchase of tuition credits at todays rates to be used in the future. By buying tuition credits with todays dollars, you protect against future tuition increases. Prepaid plans can now be offered by states or by higher education institutions. Savings plans are different in that they rely on the performance of the underlying assets in the plan to determine the growth. Savings plans can only be offered by states.
Currently up to 14,000 per year can be contributed to a 529 plan by an individual taxpayer. There is no federal tax deduction for contributing to a 529 plan, but some states offer deductions for contributing to their state sponsored plans. The federal tax benefit is that the earnings on the plan are not taxed as long as the money is eventually withdrawn to pay qualified education expenses. President Obama is proposing to eliminate this tax deduction and make the earnings taxable upon withdrawal. Of course, his rationale is that this is a tax break for the wealthy and they don’t need it
From my perspective, my tax practice deals with mostly middle class or wealthy individuals and I have found that 529 plans are far more attractive for the middle class than for the wealthy. Paying for college is a much bigger issue for middle class taxpayers than for the wealthy. Middle class taxpayers frequently need to set aside money for many years to accumulate sufficient money to pay for college but most wealthy individuals can simply write a check and don’t have that same concern. Also, there are a limited number of 529 plans and a wealthy investor looking to invest for the long term has numerous other options available with potentially higher rates of return and more attractive investment options.
Another factor to consider is that usually when Uncle Sam offers a carrot there is also a stick attached. In this case, the carrot is tax free growth as long as the money is eventually spent on qualifying educational costs. The stick is that if you withdraw money for any other purpose, the earnings are taxable plus you get to pay a 10% penalty. Each year Uncle Sam takes in revenue from this penalty. For the 2012 tax year, the Statistics of Income information posted on the IRS website shows that over 109 million dollars were received in penalties relating to 529 plans and Coverdell ESA’s. If people stop funding 529 plans, this revenue goes away.
So, what do I think of “free community college”? Well, just remember that free actually means taxpayer funded. Should taxpayers fund free community college? That’s a discussion for another day and one I don’t plan to have on this blog anytime soon. After all, tax season is here and I have to fill out all of those new Obamacare tax forms for all my clients to see if they get to pay a penalty for not having health insurance. For more information on 529 plans, a good resource can be found here.
IRS announces start of filing season
/4 Comments/in Blog /by lstaxservices_i8x1k2Yesterday, the IRS announced that it will begin processing 2014 tax returns on January 20, 2015. This applies to returns filed electronically or on paper. If you are one of the few who has their information and really want to file before that date, you can submit a paper return but they won’t begin processing them until January 20th, the same day they begin accepting electronic returns.
Motocross expenses deductible?
/0 Comments/in Blog /by lstaxservices_i8x1k2Can a construction company owner deduct the costs of his sons motocross racing? In one instance, the tax court says yes. Expenses must be ordinary and necessary for a business to deduct them. Click here to see how the judge ruled on the Evans case.
Tax Extenders Bill Passes Congress
/0 Comments/in Blog /by lstaxservices_i8x1k2Late Tuesday, the Senate passed the Tax Extenders Bill which retroactively reinstates over 50 tax provisions that expired at the end of 2013. Unfortunately, all of those provisions are only good through the end of 2014, so they will all re-expire in two weeks. Doesn’t congress make tax planning interesting?
New Tangible Property Rules: Repair/Capitalization Regulations
/0 Comments/in Blog /by lstaxservices_i8x1k2Every taxpayer who owns rental property or a business with depreciable property has some important new changes and choices to make for their 2014 tax returns. Some of this is discussed in Rev Proc 2014-16. If you haven’t discussed this with your local Enrolled Agent or other competent professional, I would advise you to have that discussion as soon as possible. If you ask your tax preparer about this and they don’t know what you are talking about, it’s time to change tax preparers.
More on Obamacare Individual Mandate
/0 Comments/in Blog /by lstaxservices_i8x1k2To follow up on what I posted last week, there are certain hardship exemptions which can be applied for on the 2014 return without advance approval from the Marketplace. A list of those hardship exemptions can be found on IRS Notice 2014-76
Obamacare Individual Mandate
/1 Comment/in Blog /by lstaxservices_i8x1k2Most taxpayers who do not have health insurance will be required to pay a fee for being uninsured. There are numerous hardship exemptions but they must be applied for and approved prior to filing your 2014 tax return. Upon approval, an exemption certificate number (ECN) will be issued which must be included in the 2014 tax return. Instructions on how to apply, as well as a list of the Hardship Exemptions can be found here
New mandate for CA employers
/4 Comments/in Blog /by lstaxservices_i8x1k2On 9/10/14, Governor Brown signed a new law which makes California the second state in the nation to mandate paid sick leave for nearly all employees in the state. This law applies to nearly all public and private employers with one or more employees. The law takes effect on July 15, 2015, but employers should be reviewing there sick leave policies now to prepare to comply by the deadline. The text of the Healthy Workplaces, Healthy Families Act can be found here.