Two popular ways to save for college tuition

With tuition costs on the rise, it is becoming far too common for a college education to exceed $100,000 by the time your child graduates.  This investment in your child’s future not only can leave you in a financial crisis, but also can create a burden on your child if they are forced to take out large student loans.  Because of the growing costs of higher education, it is never too early to start saving for your child’s college education.  Here are a couple of ways to do that.
 
One way is a 529 plan, which is usually run by a state or education institution.  Contributions to the plan are not deductible on Form 1040, but your distributions from the plan to pay for your child’s college expenses are federally tax-free.  As well, certain states that offer these plans will allow for contributions to the plan to be deductible on your state tax return, or allow for tax-free distributions.  There is also typically no maximum contribution limit.  Different states offer different tax benefits, so make sure to compare the state plans if this is the route you should choose.

Another way to save for your child’s college is with a Coverdell Education Savings Account (ESA).  You can contribute up to a maximum of $2,000 per year, but the contributions are not deductible for tax purposes.  However, the income grows tax-free in the account, and distributions are not taxed as long as they are used for qualified education expenses, to include elementary and secondary school expenses (something 529 plans do not allow).  Another benefit of a Coverdell ESA is that it offers a wider range of investment options than a 529 plan, which typically only offers mutual funds, or whatever the state run program chooses to allow. 

Choosing which method to go about saving for your child’s college education may seem overwhelming, but by knowing the differences between these two common methods, you can make an educated choice.  Both of these two choices allow for tax free distributions, however, the key areas of contrast between the two plans are the contribution limits, investment types, and state tax breaks.  Consider these areas to determine which plan best suits your needs.

William A. "Bo" Taber III, CPA

How Does the Affordable Care Act Affect You and Your Individual Tax Rate?

Have you ever wondered how your individual tax rate will be affected by the newly implemented Affordable Care Act (ACA)?  The answer to this fairly simple question can be a very tricky one and can be quite burdensome to compute.  The most important criteria for you to consider in regards to the potential impact the ACA may have on you is your amount of Modified Adjusted Gross Income (MAGI).  If your MAGI is less than designated threshold of $200,000 for a single filer, $250,000 for those married filing jointly, or $125,000 for those married filing separately, then your individual tax rate will not be affected.  If, however, your MAGI falls above the threshold, your individual tax rate may potentially be impacted.  Read on to find out more about the technical details (flow charts have also been provided that may ease the burden of this tricky computation) or contact your tax professional for further insight. 

Effective with the tax year beginning January 1, 2013, individuals who meet certain provisions of the Affordable Care Act (ACA) will be subject to an additional tax assessment when filing their 2013 returns.  When evaluating the ACA, there are two provisions that may potentially affect you and the individual tax rate applicable to you:  the Net Investment Income Tax (3.8%) and the Medicare Tax (0.9%).

First off, there is the provision affecting individuals who have Net Investment Income (NII) and whose Modified Adjusted Gross Income (MAGI) income exceeds $200,000 for single filers, $250,000 for those married filing jointly, and $125,000 for those married filing separately.  The NII tax is computed on the lesser of one’s NII for the year or the excess of MAGI above the defined threshold amounts.  This provision is said to target those who have “unearned income” whose MAGI exceeds the specified figures defined above ($200,000 for single filers, $250,000 for those married filing jointly, and $125,000 for those married filing separately).  In other words, NII is equivalent to one’s “unearned income.”  According to the ACA, “unearned income” includes interest, dividends, annuities, royalties, rents, passive activity income, capital gains, trade or business income in regards to the trading of financial instruments or commodities, and any oil or gas payments or royalties received, etc.  However, for computing the taxability of one’s unearned income, there are also certain deductions considered attributable to one’s investment income that may be subtracted in determining the NII considered taxable under the ACA.  These deductions include rent and royalty deductions and certain investment expenses such as investment interest expense and other fees and taxes allocable to investments, etc.  The net result after subtracting these deductions from one’s unearned income should then be compared with the portion of the individual’s MAGI in excess of the threshold amounts defined.   The lesser of these two figures is the portion of one’s income subject to the new NII tax of 3.8%.

The second provision affecting individuals as part of the ACA pertains to individuals whose “earned income” exceeds $200,000 for single filers, $250,000 for those married filing jointly, and $125,000 for those married filing separately.  Earned income for purposes of the ACA includes any earned wages/W-2 income, self-employment income, or any other form of earned compensation. If earned wages exceed these defined thresholds ($200,000 for single filers, $250,000 for those married filing jointly, and $125,000 for those married filing separately) then an additional tax of 0.9% is applied.

Overall, if your earned income or MAGI is below the specified thresholds ($200,000 for single filers, $250,000 for those married filing jointly, and $125,000 for those married filing separately) then neither the Net Investment Income Tax nor the Medicare Tax will affect you.  However, if your income happens to fall above these ranges, you must first determine what items make up your income and whether they are considered “earned income” or “unearned income.”  Below are some quick flowcharts to resort to in determining how the ACA may affect you.

 

Kristin Coleman, CPA

 

 

 

 

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Are you drowning…in debt?

For many people the dark cloud of debt hangs over their heads every day, overshadowing their lives with worry and stress. Many experience this unpleasant state of living from paycheck to paycheck, worrying about paying bills, worrying about providing for their family, and on and on. But it doesn’t have to be this way. With a little patience and perseverance, you can eliminate that debt!

Step 1: Know what you spend.

Track expenses for a month in a notebook or spreadsheet. All expenses – even Starbucks runs in the morning and that extra pack of gum you get at the gas station. If you don’t know where the money is going, it’s hard to see where you may be overspending. It may surprise you – and show you where you might be able to cut back and put more money towards paying down debt. You should also list all your debt, along with the interest rate and payment on each amount owed.

Step 2: Make a plan.

Suze Orman, Dave Ramsey, and others have tried and true plans that have worked for many people in their efforts to overcome debt. Programs like Crown Financial (www.crown.org) and Financial Peace University (www.daveramsey.com) are offered in many areas to teach people how to manage their money responsibly. Pick one. Try Dave Ramsey’s “snowball plan” – pay as much as you can on the highest interest rate (or smallest balance) until it’s paid off. Then add the payment you were making on that debt to the next highest interest (or next largest) balance, and so on. The idea is to let the payments “snowball” so you can pay off all that debt faster! (One warning – beware of Credit Counseling organizations. Some require large upfront payments and will not help you at all – they will just take your money. Look for a non-profit organization if you go that route.)

Step 3: Stick to the plan.

It might be tempting to fall back into those bad spending habits, but if you keep track of what you spend and have a little patience and perseverance, you will be out of debt before you know it! Then you can think about college, or retirement, or whatever you really want to spend your money on, without worrying about debt.

Debt is not a bad thing. It’s how we buy homes and cars, finance school or vacations, or buy that special birthday or Christmas gift. But planning ahead and saving up works just as well. And you won’t have to worry about how you will pay it off later.  Isn’t it time to make your money work for you instead of the other way around?

Melissa Gregg