DECEMBER 2003
CONSIDERING a 529 PLAN? FIRST, TRY AN EDUCATION SAVINGS ACCOUNT
Ever since Congress made Section 529 college
savings plans tax-free in 2001, parent and grandparents have poured
money into these accounts, and for good reason: withdrawals from 529
plans are free from federal income taxes.
But before you fund a 529 plan
each year, you'd be wise to dump your first $2,000 per child into a
Coverdell Education Savings Account (ESA). The accounts, formerly known
as Education IRAs, were renamed for a deceased Georgia senator.
An ESA
provides more investment flexibility and control, plus more opportunity
to spend earnings, tax free. Like 529s, ESAs build up tax-free earnings,
and the money is also tax-free when withdrawn.
Differences
between ESAs and 529s.
1. More investment options: Section
529 plans are great deals. But your investment choices are limited with
a 529. You can choose among different plans, but once you choose, an
investment manager directs your money. Even if you switch 529 plans,
you're merely entrusting another money manager.
On the other hand, a
Coversell ESA works like an IRA. It's a self-directed savings account
that allows you to pick your own stocks, bonds, funds, bank CDs, etc.
2. Available for wider array of expenses. On the back end, 529 withdrawals are tax free only
when they are used for higher education expenses.
But Coverdell ESA,
allows tax free withdrawals to cover the qualified K through 12
education expenses, as well as higher education. So ESAs can help you
pay private school tuition in pre-college years. Even for public school
kids, a Coverdell ESA can cover expenses such as tutoring, books,
supplies, computer equipment, uniforms, transportation and services for
special-needs students.
Sidestep ESA income hurdle
Coverdell ESAs come with a catch, but you can avoid it with some smart
planning. Here's the deal: To make the maximum $2,000 per-child
contribution to an ESA, the donor adjusted gross income must be below
$95,000 ($190,000 if filing a joint return).
If you don't qualify
because of the income limit, you can simply give the money to your
child, who can then contribute to his own account. This is allowed
because contributors don't need earned income.
Another alternative:
Grandparents can fund the child's Coverdell ESAs if their income is
below the thresholds.
Hand down ESA to next generation
If you're contributing to a child's ESA, that child
must be under age 18 when you make the contribution, but the child
doesn't have to drain the funds in the account until he turns 30.
If the
funds aren't depleted by age 30, your child can transfer the money to
another beneficiary, tax free, as long as the new beneficiary is a
qualifying family member. This way, the money in Coverdell ESAs can
continue to grow, tax free, for many years.
Under current law, a
beneficiary can make tax free withdrawals, from both a 529 plan and a
Coverdell ESA, as long as the total amount withdrawn doesn't exceed
education expenses incurred that year.
Online Research: Coverdell
Education Savings Accounts (ESAs)
Source: Research Recommendations
SECTION 529S SUFFER FROM LACK OF
UNDERSTANDING
Many savvy Americans with young kids are
jumping on the Section 529 bandwagon to benefit from the tax free
investing options. But most people still don't "get" 529
plans.
The sixth annual College Financial Preparedness Study, conducted
by Harris Interactive, found that nearly two-thirds of parents (64
percent) and grandparents (65 percent) are unfamiliar with Section 529
plans. Just 15 percent of those polled were actively investing or
considering investing in these tax advantaged plans. But when the
benefits of 529s were explained, 68 percent of parents and 44 percent of
grandparents said they would be more likely to use them.
For more advice
on 529s, visit www.collegesavings.org
or www.savingforcollege.com.
Source: Thompson RIA
BUSINESS TRAVEL TAX SAVERS
Here are three travel tax cutting ideas:
1. Mix in some pleasure with business. While
you're away on business, you might take a golfing or sightseeing side
trip.
Strategy: Keep a log of your activities. As long as the primary
purpose for the trip is business related, you can deduct the entire cost
of your air fare. The IRS considers a trip business-related if you spend
more time on business than pleasure. For example, say you spend the
first four days of your San Diego trip in business meetings. Even if you
spend the nest three days playing 36 holes of golf each day, the trip is
business related.
2. Saturday night's all right for tax breaks.
Airlines offer discounts to travelers who stay over Saturday night.
Strategy: Spend the two extra weekend days on pleasure with no tax
misgivings. How? The tax law counts the weekend as two business days if
you're staying in town to take advantage of the lower air fare-even if
you spend zero time on business. For example, say you spend Monday and
Tuesday on business and the next three days on pleasure. If you extend
the trip through the weekend for a discounted air fare, the trip is
considered business-related (four business days versus three pleasure
days).
TIP: You can also deduct your lodging and 50% of your meals over
the weekend as business-related expenses as long as those additional
outlays are less than your additional savings.
3. Bring the family.When you invite your spouse along on a
business trip, you're not allowed to deduct his or her out-of-pocket
expenses. But a couple can travel cheaper than two individuals. The tax
law lets you deduct the cost of what it would have cost to travel alone,
even if that's more than half the cost. For example, if your hotel room
costs $300 a night for a double as opposed to $225 for a single, you can
deduct $225 a night. If you're traveling by car, the entire cost of the
transportation is deductible whether your spouse comes along or not.
Source: Research Recommendations
Q&A CORNER
Q. We're a small company located in California, and we
have employees who commute weekly from Arizona and Nevada. Are we under
legal obligation to withhold taxes for our employees home states?
A. In both cases the answer is no. If your company does not
have a presence in another state, you are not bound by their laws to
withhold taxes, no matter where the employees lives. In the case of
Nevada and Arizona, you still wouldn't have to withhold for the work
done in California if your company had some sort of presence in those
two states. Nevada has no income tax to withhold, and Arizona does not
require employers to withhold income tax on wages for work performed
outside of the state. You will however, have to withhold California
income tax for both employees.
Q. I've heard that the IRS sets the limit for de minimus
benefits higher for big companies than for small ones. Is that true?
A. First, remember that the IRS doesn't
"set" the value of de minimus benefits in any formal way. De
minimus benefits are defined as benefits that are (1) infrequently
offered and (2) so small in value that accounting for them would be
administratively impractible. Although $25 is generally considered the
upward limit on the value of a de minimus benefit, that amount is
nowhere specified in statute, regulation, or guidance, and some benefits
under $25 in value would fail to qualify as deminimus-e.g., any benefit
provided in cash and most benefits provided frequently-and wold
therefore be defined as taxable compensation. The IRS determines the de
minimus status of a benefit on a case-by-case basis applying the
criteria noted above without regard to company size.
Source: Payroll Guide May 2003
Caution Do not adopt any of our recommendations
without consulting a tax professional
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