Is Your Child’s Investment Income Taxable?
February 24, 2010 | 
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The IRS wants parents to be aware of the tax rules that affect their children’s investment income. Determine if your child’s investment income should be taxed at the parents’ rate or the childs’ rate:
1. Investment Income Children with investment income may have part or all of this income taxed at their parents’ tax rate rather than at the child’s rate. Investment income includes interest, dividends, capital gains and other unearned income.
2. Age Requirement The child’s tax must be figured using the parents’ rates if the child has investment income of more than $1,900 and meet one of three age requirements for 2009:
- The child was born after January 1, 1992.
- The child was born after January 1, 1991, and before January 2, 1992, and has earned income that does not exceed one-half of their own support for the year.
- The child was born after January 1, 1986, and before January 2, 1991, and a full-time student with earned income that does not exceed one-half of the child’s support for the year.
3. Form 8615 To figure the child’s tax using the parents’ rate for the child’s return, fill out Form 8615 and attach it to the child’s federal income tax return.
4. Form 8814 When certain conditions are met, a parent may be able to avoid having to file a tax return for the child by including the child’s income on the parent’s tax return. In this situation, the parent would file Form 8814, Parents’ Election To Report Child’s Interest and Dividends.
Submitted by Sam Cohen
Questions?
5 Ways to Offset Education Costs
February 16, 2010 | Subscribe to our RSS Feed
College can be very expensive. To help students and their parents, the IRS offers the following five ways to offset education costs.
1. The American Opportunity Credit This credit can help parents and students pay part of the cost of the first four years of college. The American Recovery and Reinvestment Act modifies the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student. Generally, 40 percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
2. The Hope Credit The credit can help students and parents pay part of the cost of the first two years of college. This credit generally applies to 2008 and earlier tax years. However, for tax year 2009 a special expanded Hope Credit of up to $3,600 may be claimed for a student attending college in a Midwestern disaster area as long as you do not claim an American Opportunity Tax Credit for any other student in 2009.
3. The Lifetime Learning Credit This credit can help pay for undergraduate, graduate and professional degree courses – including courses to improve job skills – regardless of the number of years in the program. Eligible taxpayers may qualify for up to $2,000 – $4,000 if a student in a Midwestern disaster area – per tax return.
4. Enhanced benefits for 529 college savings plans Certain computer technology purchases are now added to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services.
5. Tuition and fees deduction Students and their parents may be able to deduct qualified college tuition and related expenses of up to $4,000. This deduction is an adjustment to income, which means the deduction will reduce the amount of your income subject to tax. The Tuition and Fees Deduction may be beneficial to you if you do not qualify for the American opportunity, Hope, or lifetime learning credits.
You cannot claim the American Opportunity and the Hope and Lifetime Learning Credits for the same student in the same year. You also cannot claim any of the credits if you claim a tuition and fees deduction for the same student in the same year. To qualify for an education credit, you must pay post-secondary tuition and certain related expenses for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. Students who are claimed as a dependent cannot claim the credit.
Submitted by Sam Cohen
Questions?
4th Quarter 2009 Investment Update
January 21, 2010 | Subscribe to our RSS Feed
Between the budget deficit and the extensive growth of hard currency coming out of government printing presses, clients are expressing concern over inflation. The implications of these factors, if left unchecked, may lead to higher taxes and a significant loss of purchasing power from our wages and savings.
A little background: Inflation has typically occured during economic booms and periods of high employment. Excessive economic growth overwhelms our nation’s capacity to produce enough goods and services to meet demand.
The concern: With too much hard currency in circulation and China holding trillions of dollars in US debt, the value of the US dollar will likely decrease. As a result, our unemployment rates could remain uncomfortably high while inflation creeps back into the economy. There would be no high level of employment to cushion the effects.
Investors concerned about real wealth need to find the right trade-off between expected real returns and the amount of risk they are able to tolerate.
Read our 4th Quarter 2010 Update, a discussion on Inflation Expectations.
Submitted by Jon Dinkins
Questions:
jon.dinkins@glassjacobsonia.com
10 Tax Tips to Consider If You Have Children
January 14, 2010 | Subscribe to our RSS Feed
Got Kids? They may have an impact on your tax situation. Listed below are the top 10 things the IRS wants you to consider if you have children.
- Dependents. In most cases, a child can be claimed as a dependent in the year they were born.
- Child Tax Credit. You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax.
- Child and Dependent Care Credit. You may be able to claim the credit if you pay someone to care for your child under age 13 so that you can work or look for work.
- Earned Income Tax Credit The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund.
- Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child.
- Children with Earned Income If your child has income earned from working they may be required to file a tax return.
- Children with Investment Income Under certain circumstances a child’s investment income may be taxed at the parent’s tax rate.
- Coverdell Education Savings Account This savings account is used to pay qualified educational expenses at an eligible educational institution. Contributions are not deductible, however, qualified distributions generally are tax-free.
- Higher Education Credits Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income.
- Student Loan Interest You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions.
Submitted by Sam Cohen
Questions:
A New Opportunity with Roth IRA Conversions
December 16, 2009 | Subscribe to our RSS Feed
In January 2010, there will be dramatic changes in planning for Individual Retirement Accounts. Higher income individuals will now be able to take advantage of a conversion opportunity once limited to those taxpayers with an adjusted gross income less than $100,000. The answer to the question “Should I convert to a Roth IRA,” however, is not a simple one.
THE ROTH IRA CONVERSION RULES Currently, taxpayers can convert traditional IRAs and qualified retirement accounts, such as 401(k) accounts, to a Roth IRA as long as their adjusted gross income is under $100,000. In 2010, and for all subsequent tax years, the $100,000 limit is eliminated and all taxpayers will be permitted to convert certain retirement assets to a Roth IRA.
The amount converted to a Roth IRA will be included as ordinary income for the year in which the account was converted. However, for conversion in 2010 only, taxpayers can elect to defer half of their tax liability to 2011 and the other half to 2012.
The Roth IRA can grow and be distributed tax-free as long as distributions are not taken within five years of the first contribution or conversion, and not until after age 59½.
ROTH IRA CONVERSION CONSIDERATIONS Among the factors to consider when converting retirement assets to a Roth IRA include investment timeline; available assets to pay the resulting income taxes; current income tax bracket; anticipated income tax bracket in retirement; and whether income tax rates might be lower or higher in the future. Whether a Roth IRA conversion makes sense will depend on some of these factors and each individual’s specific financial and estate planning goals and objectives.
POTENTIAL REASONS TO CONVERT TO A ROTH IRA There are a number of potential reasons to convert retirement assets to a Roth IRA. Some of the more compelling ones are:
1. Many retirement accounts have recently lost value. Conversion now would result in a lower income tax liability and the ability to shelter any future growth from income taxes. 2. A conversion to a Roth IRA can be “recharacterized” back into a traditional IRA with no tax consequences up to the tax filing deadline, plus extension, for the year of conversion. This provides great flexibility in planning, from both a tax and investment perspective. 3. The ability to recharacterize allows for the diversification of asset classes among multiple Roth IRAs. Those that decrease in value during this period can be recharacterized and those that increase in value can remain Roth IRAs, subject to individual investment and other considerations. 4. If funds outside the IRA are available to pay the income taxes on conversion, the entire amount of the converted IRA will be available to grow tax-free. 5. The conversion provides a hedge against possible increases in income tax rates for future years when distributions may be made in retirement. 6. Unlike traditional IRAs, there are no required minimum distributions from Roth IRAs starting at age 70½. Therefore, if Roth IRA funds are not needed in retirement, the entire Roth IRA can continue to grow tax-free and provide a much larger inherited account for beneficiaries. 7. Additionally, the beneficiaries of the Roth IRA can then stretch the inherited Roth IRA account tax-free over their lifetimes by taking only the minimum required distributions each year. This allows the undistributed account to remain invested and continue to grow tax-free.While considering the possibility of a Roth IRA conversion, this is also an excellent opportunity to review and update beneficiary designations on all retirement accounts because they, not your will, usually control the disposition of the accounts at death. Glass Jacobson’s position as a comprehensive wealth management firm provides us the advantage of having professionals who can address all income tax, estate and investment aspects of the decision making process. Please contact us to discuss your particular situation.
Submitted by Gary Anderson
Questions:
gary.anderson@glassjacobsonIA.com