Coverdell ESAs: The Tax-Advantaged Way to Fund Elementary and Secondary School Costs

Coverdell ESAs: The Tax-Advantaged Way to Fund Elementary and Secondary School Costs

With school letting out you might be focused on summer plans for your children (or grandchildren). But the end of the school year is also a good time to think about Coverdell Education Savings Accounts (ESAs) — especially if the children are in grade school or younger. One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition. Other benefits Here are some other key ESA benefits: • Although contributions aren’t deductible, plan assets can grow tax-deferred. • You remain in control of the account — even after the child is of legal age. • You can make rollovers to another qualifying family member. A sibling or first cousin is a typical example of a qualifying family member, if he or she is eligible to be an ESA beneficiary (that is, under age 18 or has special needs). Limitations The ESA annual contribution limit is $2,000 per beneficiary. The total contributions for a particular ESA beneficiary cannot be more than $2,000 in any year, no matter how many accounts have been established or how many people are contributing. However, the ability to contribute is phased out based on income. The phaseout range is modified adjusted gross income (MAGI) of $190,000–$220,000 for married couples filing jointly and $95,000–$110,000 for other filers. You can make a partial contribution if your MAGI falls within the applicable range, and no contribution...
Donating A Vehicle Might Not Provide the Tax Deduction You Expect

Donating A Vehicle Might Not Provide the Tax Deduction You Expect

All charitable donations aren’t created equal — some provide larger deductions than others. And it isn’t necessarily just how much or even what you donate that matters. How the charity uses your donation might also affect your deduction. Take vehicle donations, for example. If you donate your vehicle, the value of your deduction can vary greatly depending on what the charity does with it. Determining your deduction You can deduct the vehicle’s fair market value (FMV) if the charity: • Uses the vehicle for a significant charitable purpose (such as delivering meals-on-wheels to the elderly), • Sells the vehicle for substantially less than FMV in furtherance of a charitable purpose (such as a sale to a low-income person needing transportation), or • Makes “material improvements” to the vehicle. But in most other circumstances, if the charity sells the vehicle, your deduction is limited to the amount of the sales proceeds. Getting proper substantiation You also must obtain proper substantiation from the charity, including a written acknowledgment that: • Certifies whether the charity sold the vehicle or retained it for use for a charitable purpose, • Includes your name and tax identification number and the vehicle identification number, and • Reports, if applicable, details concerning the sale of the vehicle within 30 days of the sale. For more information on these and other rules that apply to vehicle donation deductions — or deductions for other charitable gifts — please contact us.   ©...
Business Owners: When it Comes to IRS Audits, be Prepared

Business Owners: When it Comes to IRS Audits, be Prepared

If you recently filed your 2016 income tax return (rather than filing for an extension) you may now be wondering whether it’s likely that your business could be audited by the IRS based on your filing. Here’s what every business owner should know about the process. Catching the IRS’s eye Many business audits occur randomly, but a variety of tax-return-related items are likely to raise red flags with the IRS and may lead to an audit. Here are a few examples: • Significant inconsistencies between previous years’ filings and your most current filing, • Gross profit margin or expenses markedly different from those of other businesses in your industry, and • Miscalculated or unusually high deductions. An owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can also catch the IRS’s eye, especially if the business is structured as a corporation. Response measures If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call. The good news is that many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the most severe version, the field audit, requires meeting with one or more IRS auditors. More good news: In no instance will the agency demand an immediate response. You’ll be informed of the discrepancies in question and given time to prepare. To do so, you’ll need...
Operating Across State Lines Presents Tax Risks — or Possibly Rewards

Operating Across State Lines Presents Tax Risks — or Possibly Rewards

It’s a smaller business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets. Doing so has become so much more feasible that many businesses quickly find themselves crossing state lines. But therein lies a risk: Operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability. But sometimes it can produce tax savings. Do you have “nexus”? Essentially, “nexus” means a business presence in a given state that’s substantial enough to trigger that state’s tax rules and obligations. Precisely what activates nexus in a given state depends on that state’s chosen criteria. Triggers can vary but common criteria include: • Employing workers in the state, • Owning (or, in some cases even leasing) property there, • Marketing your products or services in the state, • Maintaining a substantial amount of inventory there, and • Using a local telephone number. Then again, one generally can’t say that nexus has a “hair trigger.” A minimal amount of business activity in a given state probably won’t create tax liability there. For example, an HVAC company that makes a few tech calls a year across state lines probably wouldn’t be taxed in that state. Or let’s say you ask a salesperson to travel to another state to establish relationships or gauge interest. As long as he or she doesn’t close any sales, and you have no other activity in the state, you likely won’t have nexus. Strategic...
Turning Next Year’s Tax Refund Into Cash in Your Pocket Now

Turning Next Year’s Tax Refund Into Cash in Your Pocket Now

Each year, millions of taxpayers claim an income tax refund. To be sure, receiving a payment from the IRS for a few thousand dollars can be a pleasant influx of cash. But it means you were essentially giving the government an interest-free loan for close to a year, which isn’t the best use of your money. Fortunately, there is a way to begin collecting your 2017 refund now: You can review the amounts you’re having withheld and/or what estimated tax payments you’re making, and adjust them to keep more money in your pocket during the year. Reasons to Modify Amounts It’s particularly important to check your withholding and/or estimated tax payments if: • You received an especially large 2016 refund, • You’ve gotten married or divorced or added a dependent, • You’ve purchased a home, • You’ve started or lost a job, or • Your investment income has changed significantly. Even if you haven’t encountered any major life changes during the past year, changes in the tax law may affect withholding levels, making it worthwhile to double-check your withholding or estimated tax payments. Making a Change You can modify your withholding at any time during the year, or even several times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can make adjustments each time quarterly payments are due. While reducing withholdings or estimated tax payments will, indeed, put more money in your pocket now, you also need to be careful that...
Do You Know the Tax Implications of Your C Corp.’s Buy-Sell Agreement?

Do You Know the Tax Implications of Your C Corp.’s Buy-Sell Agreement?

Private companies with more than one owner should have a buy-sell agreement to spell out how ownership shares will change hands should an owner depart. For businesses structured as C corporations, the agreements also have significant tax implications that are important to understand. Buy-sell basics A buy-sell agreement sets up parameters for the transfer of ownership interests following stated “triggering events,” such as an owner’s death or long-term disability, loss of license or other legal incapacitation, retirement, bankruptcy, or divorce. The agreement typically will also specify how the purchase price for the departing owner’s shares will be determined, such as by stating the valuation method to be used. Another key issue a buy-sell agreement addresses is funding. In many cases, business owners don’t have the cash readily available to buy out a departing owner. So insurance is commonly used to fund these agreements. And this is where different types of agreements — which can lead to tax issues for C corporations — come into play. Under a cross-purchase agreement, each owner buys life or disability insurance (or both) that covers the other owners, and the owners use the proceeds to purchase the departing owner’s shares. Under a redemption agreement, the company buys the insurance and, when an owner exits the business, buys his or her shares. Sometimes a hybrid agreement is used that combines aspects of both approaches. It may stipulate that the company gets the first opportunity to redeem ownership shares and that, if the company is unable to buy the shares, the remaining owners are then responsible for doing so. Alternatively, the owners may have the first...