Tax

Have you established, or are you considering, a Section 529 savings plan for a child, grandchild, or other family member?

Such plans are a great way to help pay for a person’s college education. Contributions are not federally tax deductible, but they grow tax-free, and you can withdraw them tax-free to pay higher education expenses.

But what happens if your child or other beneficiary doesn’t use all the money in the 529 account or decides not to go to college? Indeed, many young people are choosing not to attend college these days.

What do you do with the money in an overfunded 529 plan?

Suppose you withdraw the money and use it for non-education purposes. In that case, you must pay regular income tax plus a 10 percent penalty on the earnings (but not on your original contributions).

If you want to keep tax-free treatment for withdrawals, you can change the Section 529 plan’s designated beneficiary to another qualified family member.

But starting in 2024, you have another alternative: roll over the money into a Roth IRA for the beneficiary.

If you satisfy some pretty complicated rules, you can transfer up to $35,000 to a Roth IRA tax-free. When the beneficiary turns 59 1/2, he or she can withdraw the Roth IRA money tax-free for any purpose. At age 59 1/2, the Roth IRA could be worth hundreds of thousands of dollars.

Unfortunately, lawmakers have not gone out of their way to make such rollovers easy. To qualify for tax-free treatment, you must follow the rules below:

• the 529 account must have been in existence for at least 15 years;
• you can only roll over money that has been in the 529 account for at least five years;
• each year, you can roll over an amount equal to the beneficiary’s IRA contribution limit for the year ($7,000 for 2024);
• the beneficiary must have earned income at least equal to the amount of the rollover amount; and
• you must reduce your maximum $7,000 rollover by any contributions the beneficiary makes to a traditional or Roth IRA.

Section 529 plan rollovers to a Roth IRA require a long-term commitment. You need at least five years to transfer the entire $35,000 to a Roth IRA. Such rollovers must also be coordinated with the beneficiary since they impact his or her ability to make IRA contributions.

And there’s the little wrinkle of your state’s rules. The transfers may be subject to state income taxes.

Despite the complexities involved, 529 to Roth IRA rollovers give 529 plan owners who overfund their plans welcome new flexibility in deciding what to do with their unused money.

If you want to discuss this strategy, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 27, 2024

If you are self-employed or operate a small corporation, it’s likely that you have not applied for your sick and family leave tax credits.

If that’s the case, we may need to get your act together and file amended 2021 and 2020 tax returns now. You could find up to $32,220 in tax credits.

To see if you could qualify for the credits, ask yourself if you were unable to perform services from April 1, 2021, through September 30, 2021, on any day, for any one or more of the following reasons:

1. You were subject to a federal, state, or local quarantine or isolation order related to COVID-19.
2. You were advised by a health care provider to self-quarantine due to concerns related to COVID-19.
3. You were experiencing symptoms of COVID-19 and seeking a medical diagnosis of COVID-19.
4. You were seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19.
5. You were exposed to COVID-19 or were unable to work pending the results of a test or diagnosis.
6. You were obtaining immunization related to COVID-19.
7. You were recovering from any injury, disability, illness, or condition related to such immunization.
8. You were caring for an individual who was subject to a federal, state, or local quarantine or isolation order related to COVID-19.
9. You were caring for an individual who had been advised by a health care provider to self-quarantine due to concerns related to COVID-19.
10. You were caring for your son or daughter because the school or place of care for that child was closed, or because the childcare provider for that child was unavailable, due to COVID-19 precautions.
11. You were accompanying an individual to obtain immunization related to COVID-19.
12. You were caring for an individual who was recovering from any injury, disability, illness, or condition related to the immunization.

If you answered yes to any of these 12 questions, you qualify for tax credits. And such credits could total $32,220 just for you. There’s much to this.

The point of this short note is to advise you of the tax credits and the fact that the clock ticks for claiming the credits. If you are eligible, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 8, 2024

If you invest or trade in Bitcoin, non-fungible tokens (NFTs), Stablecoins, or other digital assets, prepare for sweeping new tax reporting requirements.

Congress wants the IRS to crack down on taxpayers who buy and sell crypto but don’t report or pay tax on their gains. To do so, it wants people and companies that facilitate the sale of digital assets to provide the IRS with the same information that stockbrokers must provide when selling stocks and other investments.

Crypto is complicated, so it has taken the IRS two years to draft over 280 pages of proposed regulations explaining how these new reporting requirements should work.

Starting with the 2025 tax year, digital asset brokers must file a new Form 1099-DA with the IRS whenever they facilitate the sale of digital assets. The 1099-DA will include such information as the customer name and TIN, sales proceeds, tax basis, and gains and losses.

“Digital assets” are defined broadly to include any digital representation of value recorded on a blockchain, including Bitcoin and other cryptocurrencies, Stablecoins, and NFTs.

“Digital asset brokers” include any entities that provide services that facilitate sales of digital assets and that would typically know or be in a position to know the identities of the parties involved in such sales. This includes digital asset trading platforms, payment processors, and many digital wallet providers.

The IRS scheduled the reporting rules to go into effect in two stages: For the 2025 tax year, brokers must report the gross proceeds of digital asset sales. For 2026 and later, brokers must report the adjusted basis and whether any gains or losses are short-term or long-term. Brokers do not have to report digital asset sales for tax years 2023 and 2024.

When the reporting requirements take effect, the IRS estimates that it will receive eight billion new Form 1099-DAs each year filed on behalf of 13 million to 16 million taxpayers.

Receiving Form 1099-DA should make your life easier when you file your tax return. You can rely on the gains and losses reported on the form when you complete your return.

The new rules will also enable the IRS to compare the amounts reported on Form 1099-DA with the numbers taxpayers report on their returns. If there is a discrepancy, the IRS system will automatically send you a notice to correct your error. So, the days of evading tax on crypto transactions may soon be over.

The proposed regulations are not set in stone. There could be more changes before they go into effect.

If you want to discuss your crypto activity or the proposed regulations, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 3, 2024