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Maximizing Qualified Tuition Program Contributions

Qualified Tuition Programs, commonly referred to as Section 529 plans (named after the section of the IRS Code that created them), are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education, while you maintain control of the funds. The earnings from these accounts grow tax-deferred and are tax-free if used to pay for qualified higher education expenses. 529 plans can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 plans are excellent vehicles for college funding.

Tax Benefits: There is no federal tax deduction for making a contribution, but taxes on the earnings within a 529 plan are not only tax-deferred while they are held in the account, but are tax-free when withdrawn to pay for qualified education expenses. This allows you to accumulate money for college at a much faster rate than you can with an account where you have to pay tax on the investment gains and earnings.

How Much Can Be Contributed? Unlike the Coverdell Education Savings Accounts that limit the annual contribution to $2,000, Section 529 plans allow you to put away larger amounts of money. There are no income or age limitations for the Section 529 plans. The maximum amount that can be contributed per beneficiary is based on the projected cost of a college education and will vary between state plans. Some states base their maximums on an in-state, four-year education, while others base theirs on the costs of the most expensive schools in the U.S., including graduate studies. Most have limits in excess of $200,000. Generally, once an account reaches the plan-imposed cap, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow through investment earnings and growth.

How Much Should You Contribute? Although there is no contribution limit other than the plan’s limit based on the cost of the education, there are some gift tax limitations that may influence the amount of your contribution. Contributions to Section 529 plans are considered completed gifts and are subject to the gift tax rules. Under these rules, individuals can annually give away (gift) money to another individual, only up to an annual limit (double for a married couple), without triggering gift taxes or reducing their lifetime gifts and inheritance exclusions. The gift exclusion amount is inflation adjusted. For 2014, the gift tax exclusion is $14,000 per recipient.

Five-Year Option: Where contributions to a qualified tuition program exceed the annual gift exclusion amount, a donor may elect to take certain contributions to a QTP into account ratably over a five-year period in determining the amount of gifts made during the calendar year. The provision applies only for contributions of up to five times the annual exclusion amount available in the calendar year of the contribution. Any excess may not be taken into account ratably and is treated as a taxable gift in the calendar year of the contribution. Thus, for 2014 an individual could contribute up to $70,000 (five times the 2014 annual exclusion amount), while a married couple could contribute twice that amount ($140,000) to the same individual. The gift would reduce the donor’s estate by the full amount of the gift by the end of the five-year period. Should the donor die before the five-year period elapses, any amount in excess of the allowable annual exclusions would revert back to the donor’s estate.Note: A gift tax return must be filed for the year of the contribution if it exceeds the annual gift tax exclusion and to claim this special exemption.

Don’t Overlook Additional Contribution Opportunities During The Five-Year Period: If in any year after the first year of the five-year period the annual exclusion amount is increased, the donor may make an additional contribution in any one or more of the four remaining years up to the difference between the exclusion amount as increased and the original exclusion amount for the year or years in which the original contribution was made.

If you have previously utilized the five-year option, you may have the opportunity to make additional annual contributions since the annual exemption amount has increased in the past few years (see table below).

 

Year 2009 to 2012 2013 to 2014
Annual Gift Exemption $13,000 $14,000

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.

Are You In Danger of An Audit

During fiscal year 2013, the IRS collected almost $2.3 trillion in taxes (net of refunds) and processed more than 240 million returns. More than 118 million individual income tax return filers received tax refunds that totaled $312.8 billion. In fiscal year 2013, the IRS spent an average of 41 cents to collect each $100 of tax revenue.

So what are your chances of being audited?A total of $1,404,931 individual income tax returns were audited, out of a total of $145.8 million individual returns that were filed in the previous year. This is about 0.8% of all individual returns filed, down from the previous year. This downward trend is expected to continue for the foreseeable future because of IRS budget reductions. Only 24.5% of the individual audits were office audits conducted by revenue agents, tax compliance officers, and tax examiners; the bulk of the audits (about 75.5%) were correspondence audits. These percentages are about the same as they were in the prior year. The IRS is pretty savvy at selecting which returns to audit, since approximately 85% of the audits result in the taxpayer owing additional taxes.

What issues are the audits focusing on? Here is a roundup of selected audit rates:

 

Earned Income Tax Credit (EITC) – EITC continues to be an area of high taxpayer fraud so it stands to reason these returns were and will be the subject of high audit rates. Of the total number of returns audited, 538,562 (34.6%) were selected on the basis of an earned income tax credit claim.
Schedule F (Individual Farm Returns) - About 1.3 million individual returns included farm returns. Of this group, only 5,044 (0.4%) were audited.
Individual returns can include additional business related schedules that can increase the odds of an audit. Among those are Schedule C (non-farm sole proprietorship), Schedule E (supplemental income and loss from rentals, partnerships and S-corporations), or Form 2106 (employee business expenses). The following statistics apply to non-EITC returns including these schedules:

Individual Returns without a Schedule C, E, F, 2106 –0.4%

Individual Returns with a Schedule E or 2106 – 1.0%

Individual Returns with a Schedule C – These are categorized by size of gross receipts reported on the return:
Under $25,000 – 1.0%
$25,000 to $100,000 – 2.3%
$100,000 to $200,000 – 3.0%
$200,000 or more – 2.7%
The IRS also focuses their audits on higher-income returns, as evidenced by the following statistics based on total positive income (TPI):

Non-business returns with a TPI of at least $200,000 and under $1 million – 2.5%

Business returns with a TPI of at least $200,000 and under $1 million – 3.2%

All returns with a TPI of $1 million or more – 10.8%
For returns other than individual returns, the audit rates by type were:

Estate and trust income tax returns - 0.1%
Corporations with less than $10 million of assets - 1.0%
Corporations with $10 million or more of assets - 15.8%
S corporations - 0.4%
Partnerships - 0.4%
Estate tax returns - 11.6%
Gift tax returns - 1.1%
Thus S corporations and partnerships have the least chance of being audited. If you’re self-employed or thinking about starting a business, it’s worthwhile to either incorporate or create a partnership such as an LLC. If anything, you’ll reduce the chance of being audited.

In fiscal year 2013, the IRS assessed 29.07 million civil penalties against individual taxpayers, of which 58.3% were for failure to pay and 26.8% were for underpayment of estimated tax. There were also 731,696 assessments for accuracy and negligence penalties.

The IRS received 74,000 offers in compromise in fiscal year 2013 (up from 64,000 in 2012). An offer in compromise is a proposal by a taxpayer to the federal government that would settle a tax liability for payment of less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. In 2013, the IRS accepted 31,000 offers for an acceptance rate of about 42%.

Because of the IRS’s high success rate for their audit programs, it is probably not wise for a taxpayer to represent themselves during an audit. This is best left to those who understand the audit process and can address potential issues that may arise.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.

Find Lost Money

Unclaimed property refers to accounts in financial institutions and companies that have had no activity generated or contact with the owner for a period of one year or longer (depending upon state law). Common forms of unclaimed property include savings or checking accounts, stocks, uncashed dividends or payroll checks, refunds, traveler’s checks, trust distributions, unredeemed money orders or gift certificates (in some states), insurance payments or refunds and life insurance policies, annuities, certificates of deposit, customer overpayments, utility security deposits, mineral royalty payments, and contents of safe deposit boxes.

Financial institutions and companies will turn these funds over to a state unclaimed property department where the funds are held until claimed by the owner. This typically occurs when you relocate, close a business address, misplace a check, etc. It can also occur if you are the beneficiary of an estate and the trustee is unable to locate you.

There are various ways to locate these assets. There are commercial firms that may seek you out. However, you can perform a search for free in a number of ways. For instance, each state has a website for its unclaimed property department, allowing you to search state by state. Generally, one would only search the state that he or she has been a resident of.

California State Controller’s Office is in charge of California’s unclaimed property. To see if you have money waiting for you in California, please visithttps://ucpi.sco.ca.gov/UCP/Default.aspx. Its really easy to use and fun. It’s always exciting when you do a search for yourself and you find money that belongs to you!

There is also a website developed by the National Association of Unclaimed Property Administrators (NAUPA) that provides links from a map to each individual’s state’s search site. NAUPA is also currently developing a search site that will locate unclaimed money in all states called missingmoney.com. However, that site is currently under development and does not include all states, so it is wise to check both it and all states in which you have been a resident.

What are your odds of finding some lost money? Well, the author, while researching this article, found three accounts in his name totaling over $1,200. A nice bonus for writing the article! Who knows what you will find, but it only takes a few minutes to check and could yield some pleasant surprises. On its website, NAUPA indicated that the average claim was $892.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.

Tax Facts About Summertime Child Care Expenses

Many parents who work or are looking for work must arrange for care of their children during school vacations. If you are one of those, and your children requiring care are under 13 years of age, you may qualify for a tax credit that can reduce your federal income taxes.

Here are some facts you need to know about the tax credit available for child care expenses. The Child and Dependent Care Credit is available for expenses incurred during the lazy, hazy days of summer and throughout the rest of the year. You must claim the qualifying child for whom you pay care expenses as your dependent in order to qualify to claim the credit (but there is an exception for divorced or separated parents).

Day Camps – The costs of day camp generally count as expenses towards the child and dependent care credit. A day camp or similar program may qualify, even if the camp specializes in a particular activity, such as soccer or computers. The rule that a dependent care center must comply with applicable state and local laws also applies to a day camp where more than six persons are cared for in return for a fee.

Overnight Camp or Tutoring – No portion of the cost of an overnight camp or a tutoring program is a qualified expense.

School Expenses – Only school expenses for a child below the level of kindergarten will qualify for the credit. But expenses paid for before- and after-school care of a child in kindergarten or a higher grade are eligible.

Day Care Facility – The expenses paid to the day care center qualify. If the day care center cares for more than six persons, it must comply with applicable state and local laws.

In-Home Care – If your childcare provider is a “sitter” at your home, the sitter is considered your employee, and you may need to pay payroll taxes and file payroll returns.

Credit Percentage – The actual credit can be between 20 and 35 percent of your qualifying expenses, depending upon your income. The higher your income, the lower the credit percentage.

Maximum Qualifying Expenses – You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit. This will provide a tax credit of between $600 and $1,050 for one child and $1,200 and $2,100 for two or more, depending upon your income. If the expenses exceed your work earnings, use the earnings to figure the credit. Dependent care benefits received through your employer will also affect the computation of the credit and could result in no credit being allowed.

Records Required – To claim the credit on your tax return, you will need to provide the care provider’s name, address and tax ID number. No credit is allowed without that information, except the tax ID number is not needed if the provider is a tax-exempt organization such as a church or school. You may run across care providers who are reluctant to provide their ID numbers because they don’t plan on reporting their income and paying their taxes. Just remember, without the ID number, you cannot claim the credit. Be sure to obtain the required information before you pay the provider.

If you paid work-related expenses for the care of two or more qualifying persons, the expense dollar limit is $6,000. This $6,000 limit does not need to be divided equally among them. For example, if your work-related expenses for the care of one child are $3,200 and your work-related expenses for another child are $2,800, you can use the total, $6,000, when figuring the credit.

State Child Care Credit – Some states also allow a similar credit on the state income tax return. If your state is one of those, additional information, such as the care provider’s phone number, may be required.
This credit is also available if you are filing a joint return and need to pay for care for your child while you work and your spouse is a full-time student. You can also claim this credit if you are working and care for a spouse that is physically or mentally incapable of self-care.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.

Scammers Getting More Brazen

We have previously cautioned you not to be duped by Internet and mail scams dreamed up by some pretty enterprising thieves. Most of those revolve around the Internet and e-mails, trying to steal your identity or have you pay tax liabilities that don’t exist.

The latest schemes revolve around phone calls from individuals claiming to be IRS or State agents who demand immediate payment for fabricated tax liabilities. Don’t get caught up in these scams. Always remember, the first contact you will receive from the IRS or state is letter, never a phone call or e-mail.

Here are some guidelines to follow to avoid becoming a victim:

 

First and foremost, always remember, the first contact you will receive from the IRS or state will be by U.S. mail. If you receive e-mail or a phone call claiming to be from the IRS, consider it a scam.
E-mails – Do not respond or click through to any embedded links. Instead, forward it to phishing@irs.gov.

Phone calls – If someone calls claiming to be an IRS agent, ask for their name, badge number, and phone number. Tell them your representative will call them back. Then call this office.
Never provide financial information over the phone via the Internet, or by e-mail. That includes:
Social Security Number – Always resist giving your Social Security number to anyone. The more firms or individuals who have it, the greater the chance it can be stolen.

Birth Date – Your birth date is frequently used as a cross check with your Social Security Number. A combination of birth date and Social Security number can open many doors for ID thieves. Is your birth date posted on social media? Maybe it should not be! That goes for your children, as well.
Bank Account and Bank Routing Numbers – This along with your name and address will allow thieves to tap your bank accounts. To counter this threat, many banks now provide automated e-mails alerting you to account withdrawals and deposits.
Credit/Debit card numbers – Be especially cautious with these numbers, since they provide thieves with easy access to your accounts.
There are individuals whose sole intent is to steal your identity and sell it to others. Limit your exposure by minimizing the number of charge and credit card accounts you have. The more who have your information, the greater the chances of it being stolen. Don’t think all the big firms are safe; there have been several high-profile database breaches in the last year.

The IRS is not the only disguise scammer’s use. They pretend to be attorneys representing estates, lottery payouts, and other such subterfuge to draw you into their web. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck!

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.