Archive for December 2013

Planning your child’s education? A Coverdale IRA may be the answer

Saving for your child’s education has always been a challenge. Over the past several years, each state has announced their own savings plans—the “529” plans you may have heard about. These plans have made saving easier, but may not be flexible enough for everyone.

Another option that many people don’t know about is the Coverdale IRA. Depending on your situation it may a good option to use as a replacement or in addition to a 529 plan.

For all education

A 529 plan is a great tool to help pay for your child’s college tuition. However, that’s the only thing it covers—college.

Coverdale IRAs can be used to pay for all of your child’s education, from kindergarten through college. So, if you’re planning on sending your child to private school, it may be worth looking into a Coverdale IRA.

You may be thinking “That’s great! Why hasn’t anyone told to me about this before?”

There are a few details that have kept Coverdale IRAs under the radar. For one, the yearly limit on contributions is $2000. Many people have ignored Coverdale IRAs because this yearly limit is relatively low compared to other options. But here’s the thing— $2000 is $2000 and that money earns tax exempt for qualifying expenses. Even though it’s “just” $2000, the interest adds up quick.

Since Coverdale IRAs aren’t sponsored by the states like 529 plans, they don’t receive a state tax deduction. Each state would obviously like you to be using their specific 529 plan, so the lack of a deduction for Coverdale contributions shouldn’t be surprising.

Because of their flexibility, Coverdale IRAs are still worth considering. Being exempt from federal taxes for K-College spending is a big deal and they’re an excellent place to deposit the random gift money that your child receives from relatives and friends.

As always where taxes are concerned, you should visit with your tax professional to see how a Coverdale IRA would fit into your specific tax plan. It may or may not be the right choice for you.

Warning: New Tax Rules for Property Repairs

4-repair-rulesIf you own a business or have investment property, there are new IRS rules that will effect you when it comes to repairs. The government is now treating repairs and improvements very differently and it’s important that you classify each appropriately. Unfortunately, the rules are a bit complex.

Under the new rules, improvements to your property may cost you significantly more than they have in the past.

What’s the impact in real terms? If you have a repair that costs $2000, you can deduct the full $2000 next year.  If you have an improvement, no matter the cost, you have to depreciate the cost over 27.5 years, meaning next year’s deduction is going to be pretty low.

So what types of investments are going to get you into improvement territory?

The IRS defines an improvement as anything that provides betterment, adaptation, or restoration. If you have to replace the plumbing and wiring in a building to bring it up to code, that’s an improvement. If you add a garage – improvement. If you rebuild the facade on an old main street building – also an improvement.

It gets a bit murkier when you look at damaged property. If you suffer damage from a storm and perform repairs, you’ll need to determine what has been simply repaired (back to a pre-storm state) and what has been improved (better than the pre-storm state).

Depending on the extent of the damage and size of your property, making these differentiations and calculations can get complex very fast and as stated above, mis-classifying expenses under the wrong category may subject you to more tax liability than you were expecting.

It’s important to make sure your accountant and tax advisor are involved and up to speed with all the repairs you make to classify them appropriately.

If you’ve been holding off on needed repairs and can make them before the end of the year, the tax rules are much simpler. So if you can afford to make the repairs now, you may be better off. Check with your tax professional; they can give you the best feedback on how you need to plan your repairs from a tax perspective.

Did you know that debt forgiveness is income?

If you’ve had debt cancelled on a credit card or have mortgage forgiveness from the recent housing finance disaster, you may be in for a surprise when tax time comes around. What seemed like a lucky break at the time, may turn into an unplanned expense.

Why?

Because the IRS looks at debt forgiveness as income.

If you’ve been forgiven for payday loan debt, credit card debt—any kind of debt, that forgiveness is treated as income.

If you received a $30,000 loan forgiveness on for your mortgage, you’ll be paying taxes on an extra $30,000 worth of income. Depending on your overall income, that could significantly impact your tax bill.

But that doesn’t mean you should avoid having debt forgiven. If you have to pay $5000 in taxes on a $30,000 forgiveness, that’s still $25,000 you don’t owe.

There is some relief for people that own the home they live in and receive debt forgiveness for their mortgages. Current IRS rules exempt forgiveness in this situation. Unfortunately, this rule expires as the end of the year and may not be renewed.

If you’ve been fighting with your mortgage company about forgiving debt, now is the time to make a decision—either quit fighting and accept their proposed forgiveness, so you can qualify for the tax exemption on it, or dig in your heels, knowing that you may not qualify for the exemption if it doesn’t get renewed.

Either way, you need to work with your tax advisor so you have a clear view of what your tax situation is going to be if you receive loan forgiveness. It may be a good surprise to learn you aren’t going to have to pay back that money, but an unpleasant surprise when April 15th comes around.

How to protect your Social Security from income taxes

Folks planning for a stress-free retirement are often surprised by all the tax and paperwork issues that come up whenthey actually do retire. Those that are relying on Social Security for their day-to-day expenses sometimes find themselves getting smaller checks than they thought they would.

I work with my clients to try to prevent that situation.

Leveraging other accounts

One of the tactics we can use to minimize or eliminate taxes on Social Security income is to handle your other retirement accounts (if you have them) with care.

If you have an IRA, an Individual Retirement Account, you’re required to make a minimum distribution from this account when you reach 70 and 1/2 years of age.  You’ve already paid the taxes on this money, but it’s still treated as income.

Instead of double-taxing your IRA payments, the government will tax your Social Security payments. Depending on your situation and even with the money from the required IRA distribution you may wind up not breaking even.

So how do we prevent that?

The best way I’ve found is by following a tax rule that allows you to assign your IRA distribution to a charity. From the IRS’ perspective, this completely wipes out the distribution as income and can prevent your Social Security payments from being taxed.

The problem is, the rule that allows this exemption expires at the end of the year. It’s possible that Congress may renew it, but if you’re in a situation were you may be getting Social Security checks with a big chunk of taxes taken out, now is the time to setup your IRA distribution to charity.

All of this fits into a broader picture of tax planning. If you’re nearing retirement or are already retired, it’s in your best interest to be working with a tax professional to avoid situations like taxed Social Security payments. There are a ton of similar problems that almost always surprise the people affected by them. So if you have questions about this specific issue or retirement in general, ask your tax advisor for help.