Author: Leon Clinton

Tax

Saving for Education: 529 Plans

Many parents are looking for ways to save for their child’s education and a 529 Plan is an excellent way to do so. Even better, is that thanks to the passage of tax reform legislation in 2017, they are now available to parents wishing to save for their child’s K-12 education as well as college or vocational school.

Every state has a program allowing persons to prepay for future higher education, tax-free. You may open a Section 529 plan in any state, and there are no income restrictions for the individual opening the account. Contributions, however, must be in cash and the total amount must not be more than reasonably needed for higher education (as determined initially by the state). Depending on the state, there may be a minimum investment required to open the account (typically, $25 or $50).

Each 529 Plan has a Designated Beneficiary (the future student) and an Account Owner. The account owner may be a parent or another person and is typically the principal contributor to the program. He or she is also entitled to choose–as well as change–the beneficiary.

Unlike some of the other tax-favored higher education programs such as the American Opportunity and Lifetime Learning Tax Credits, federal tax law doesn’t limit the benefit only to tuition. Room, board, lab fees, books, and supplies can be purchased with funds from your 529 Savings Account. Individual state programs could have a more narrow definition, however, so be sure to check with your particular state.

Neither the account owner or beneficiary may direct investments, but the state may allow the owner to select a type of investment fund (e.g., fixed income securities), change the investment annually as well as when the beneficiary is changed. The account owner decides who gets the funds (can pick and change the beneficiary) and is legally allowed to withdraw funds at any time, subject to tax and penalties (more about this below).

Tax-free Distributions

Distributions from 529 plans are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books, supplies, equipment, and special needs services. For someone who is at least a half-time student, room and board also qualify. Qualified expenses also include computers and related equipment used by a student while enrolled at an eligible educational institution; however, software designed for sports, games, or hobbies does not qualify unless it is predominantly educational in nature. Starting in 2018, “qualified higher education expenses” also include up to $10,000 in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.

Furthermore, distributions are tax-free even if the student is claiming the American Opportunity Credit, Lifetime Learning Credit, or tax-free treatment for a Section 530 Coverdell distribution–provided the programs aren’t covering the same specific expenses.

Federal Tax Rules

Income Tax. Contributions made by the account owner or other contributor are not deductible for federal income tax purposes, but many states offer deductions or credits. Earnings on contributions grow tax-free while in the program. Distribution for a purpose other than qualified education is taxed to the one receiving the distribution. In addition, a 10 percent penalty must be imposed on the taxable portion of the distribution, comparable to the 10 percent penalty in Section 530 Coverdell plans. Also, the account owner may change the beneficiary designation from one to another in the same family. Funds in the account roll over tax-free for the benefit of the new beneficiary.

Gift Tax. For gift tax purposes, contributions are treated as completed gifts even though the account owner has the right to withdraw them – thus they qualify for the up-to-$15,000 annual gift tax exclusion. One contributing more than $15,000 may elect to treat the gift as made in equal installments over that year and the following four years, so that up to $75,000 can be given tax-free in the first year.

Estate Tax. Funds in the account at the designated beneficiary’s death are included in the beneficiary’s estate – another odd result, since those funds may not be available to pay the tax. Funds in the account at the account owner’s death are not included in the owner’s estate, except for a portion thereof where the gift tax exclusion installment election is made for gifts over $15,000. For example, if the account owner made the election for a gift of $75,000 in 2018, a part of that gift is included in the estate if he or she dies within five years.

Tip: A Section 529 program can be an especially attractive estate-planning move for grandparents. There are no income limits, and the account owner giving up to $75,000 avoids gift tax and estate tax by living five years after the gift, yet has the power to change the beneficiary.

State Tax. State tax rules are all over the map. Some reflect the federal rules, some quite different rules. For specifics of each state’s program, see http://www.collegesavings.org.

Professional Guidance

Considering the differences among state plans, the complexity of federal and state tax laws, and the dollar amounts at stake, please call the office and speak to a tax and accounting professional before opening a 529 plan.

Tax

Tax Due Dates for June 2018

June 11

Employees who work for tips – If you received $20 or more in tips during May, report them to your employer. You can use Form 4070.

June 15

Individuals – If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, file Form 1040 and pay any tax, interest, and penalties due. U.S. citizens living in the U.S. should have paid their taxes on April 17. If you want additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then file Form 1040 by October 15. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline.

Individuals – Make a payment of your 2018 estimated tax if you are not paying your income tax for the year through withholding (or will not pay enough tax that way). Use Form 1040-ES. This is the second installment date for estimated tax in 2018.

Corporations – Deposit the second installment of estimated income tax for 2018. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.

Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in May.

Employers – Social Security, Medicare, and withheld income tax.If the monthly deposit rule applies, deposit the tax for payments in May.

Quickbooks

Getting Ready for Payroll in QuickBooks Online

Payroll is probably the most complex element of small business accounting. Not only are you directly responsible to your employees, but you also need to make sure you are handling everything related to benefits and payroll taxes correctly.

Whether you are switching from a manual system to QuickBooks Online, or you have just hired your first employee, you will soon discover that the site can make your payroll-related tasks much more organized and accurate–speeding up the process tremendously.

But before you start getting ready for your first payroll run, you have a lot of setup work to be done. Be sure to leave yourself time before those first paychecks are expected. This is not meant to be a payroll setup tutorial. While some step-by-step instruction is provided, initially, we just want you to see what information you will need to have available and how QuickBooks Online handles it.

Building a Backbone

There is no particular order set in stone for your payroll preparation tasks, although you will need to provide some background information about your company and its policies before you can start creating employee records.

QuickBooks Online does not walk you through the steps required; however, it does display a page with links to all of the data that you will have to enter. Click the gear icon in the upper right, and then click Payroll Settings. You will see this screen:


Figure 1: QuickBooks Online’s Payroll Settings screen displays links to the pages where you will manage your setup tasks.

You would have entered information about your Contact Informationand Work Locations (under the Business Information heading) when you first signed on to QuickBooks Online. At the same time, you would have been exposed to the Chart of Accounts, which already has accounts designated for payroll. You can see them by clicking Preferences | Accounting, but please do not customize these. If modifications are needed, we will do them for you.

Payroll Policies

How often will you pay your employees? Go up to the Payroll heading in the upper left and click on Pay Schedules. Click Createand open the drop-down list next to Pay Period to select the frequency desired. Then enter the date for the first payroll you will run in QuickBooks Online and the end date for the period that it covers. Click the box below if you want this to be the default setting for all employees. Then click OK to return to the previous page.

Open the Vacation and Sick Leave Policies window. If you do not yet have accrual rules for these paid days off, let us help you here. It is complicated. When you are done, click the back arrow to return to the Pay Policies window and select Deductions/Contributions. Are you offering benefits like health insurance? You will need to have your paperwork and information handy before you start completing this section.


Figure 2: Before you can pay employees, you will need to have entered information about the benefits you offer so you can withhold dollars for them.

Click the plus sign (+) in front of Add a New Deduction/Contribution and complete the fields here, then click OK. You will assign these deductions to employees on their individual records in QuickBooks Online. If there are any Employee Garnishments needed (like child support), click the down arrow next to Add Garnishment for and select the worker from the list. You will provide details for these in the window that opens. This information was most likely provided to you by the agency requesting it. When you are done, click OK.

Taxes and More

If you are new to payroll and have never dealt with payroll taxes before, you are going to need our help getting this complicated element set up correctly. Even if you have, we would recommend that you call and set up a consultation with one of the QuickBooks Online experts in the office. QuickBooks Online does a good job of providing guidance here, but failure to submit payroll taxes (or pay them incorrectly) can lead to penalties and fines–or worse.

In addition, there are other setup tasks you will need to complete, such as:

  • Connecting your payroll bank account to QuickBooks Online.
  • Creating employee records.
  • Setting payroll production preferences.

Setup is by far the most challenging part of processing payroll in QuickBooks Online. Once that is done, you will just be entering hours and making modifications. Please contact the office if you are planning to take this on or have any questions.

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