Monthly Archives: May 2013

Tax Breaks for Families and Students

Westchester NY CPA Paul Herman has all the answers to your personal finance questions!

Scarsdale CPA tax tips for families

You may be eligible for select tax breaks as a student or family

Recent legislation made permanent or extended several tax breaks for families. In addition, several education breaks were made permanent or extended.

Child Credit. For 2013 and beyond, the maximum credit for an eligible under-age-17 child (Child Credit) was scheduled to drop from $1,000 to only $500. The legislation permanently installs the $1,000 maximum credit.

Adoption Expenses. The Bush tax cut package included a major liberalization of the adoption tax credit and also established tax-free employer adoption assistance payments. These taxpayer-friendly provisions were scheduled to expire at the end of 2012. The credit would have been halved and limited to only special needs children. Tax-free adoption assistance payments from employers would have disappeared. The legislation permanently extends the more-favorable Bush-era rules.

Education Credit. The American Opportunity Credit, worth up to $2,500, can be claimed for up to four years of undergraduate education and is 40% refundable. It was scheduled to expire at the end of 2012. The legislation extends the American Opportunity Credit through 2017.

College Tuition Deduction. This write-off, which can be as much as $4,000 at lower income levels and as much as $2,000 at higher income levels, expired at the end of 2011. The legislation retroactively restores the deduction for 2012 and extends it through 2013.

Student Loan Interest Deduction. The student loan interest write-off can be as much as $2,500 (whether the taxpayer itemizes or not). Less favorable rules were scheduled to kick in for 2013 and beyond. The legislation permanently extends the more favorable rules that have applied in recent years.

Coverdell Education Savings Accounts. For 2013 and beyond, the maximum contribution to federal-income-tax-free Coverdell college savings accounts was scheduled to drop from $2,000 to only $500, and a stricter phase-out rule would have limited contributions by many married filing joint couples. The legislation makes permanent the favorable rules that have applied in recent years.

Please contact us for all financial inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Larchmont NY, Mamaroneck NY, Rye NY, Chappaqua NY, Katonah NY and beyond.

Roth IRAs for Kids

If you have a child who works, consider encouraging the child to use some of the earnings for Roth IRA contributions. All that is required to make a Roth IRA contribution is having some earned income for the year. Age is irrelevant. Specifically, your child can contribute the lesser of: (1) earned income or (2) $5,000.

By making Roth IRA contributions for just a few years now, your child can potentially accumulate quite a bit of money by retirement age.

Tips from Scarsdale CPA Paul Herman on Saving for Retirement

The earlier the better when it comes to starting a Roth IRA.

Realistically, however, most kids will not be willing to contribute the $5,000 annual maximum even when they have enough earnings to do so. Be satisfied if you can convince your child to contribute at least a meaningful amount each year. Remember, if you are so inclined, you can make the Roth IRA contribution for your child.

Here’s what can happen. If your 15-year-old contributes $1,000 to a Roth IRA each year for four years starting now, in 45 years when your child is 60 years old, the Roth IRA would be worth about $33,000 if it earns a 5% annual return or $114,000 if it earns an 8% return. If your child contributes $1,500 for each of the four years, after 45 years the Roth IRA would be worth about $50,000 if it earns 5% or about $171,000 if it earns 8%. If the child contributes $2,500 for each of the four years, after 45 years the Roth IRA would be worth about $84,000 if it earns 5% or a whopping $285,000 if it earns 8%. You get the idea. With relatively modest annual contributions for just a few years, Roth IRAs can be worth eye-popping amounts by the time your child approaches retirement age.

For a child, contributing to a Roth IRA is usually a much better idea than contributing to a traditional IRA for several reasons. The child can withdraw all or part of the annual Roth contributions-without any federal income tax or penalty-to pay for college or for any other reason. (However, Roth earnings generally cannot be withdrawn tax-free before age 59 1/2.) In contrast, if your child makes deductible contributions to a traditional IRA, any subsequent withdrawals must be reported as income on his or her tax returns.

Even though a child can withdraw Roth IRA contributions without any adverse federal income tax consequences, the best strategy is to leave as much of the account balance as possible untouched until retirement age in order to accumulate a larger federal-income-tax-free sum.

What about tax deductions for traditional IRA contributions? Isn’t that an advantage compared to Roth IRAs? Good questions. There are no write-offs for Roth IRA contributions, but your child probably will not get any meaningful write-offs from contributing to a traditional IRA either. Any additional income will probably be taxed at very low rates. Unless your child has enough taxable income to owe a significant amount of tax (not very likely), the advantage of being able to deduct traditional IRA contributions is mostly or entirely worthless. Since that is the only advantage a traditional IRA has over a Roth IRA, the Roth option almost always comes out on top for kids.

By encouraging kids with earned income to make Roth IRA contributions, you’re introducing the ideas of saving money and investing for the future. Plus, there are tax advantages. It’s never too soon for children to learn about taxes and how to legally minimize or avoid them. Finally, if you can hire your child as an employee of your business, some additional tax advantages may be available.

Westchester CPA Paul Herman is here to answer all of your personal finance questions. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Katonah NY, Mount Kisco NY, Rye NY, Bedford NY and beyond.

 

Business or Hobby?

White Plains financial planners here at Herman & Company CPA’s have all the answers to your personal finance questions!

It is generally accepted that people prefer to make a living doing something they like. A hobby is an activity for which you do not expect to make a profit. If you do not carry on your business or investment activity to make a profit, there is a limit on the deductions you can take.

Scarsdale CPA Tax Tips

Some lucky people can call golf both a business and a hobby!

You must include on your return income from an activity from which you do not expect to make a profit. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. You cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, come under this limit. So does an investment activity intended only to produce tax losses for the investors. The limit on not-for-profit losses applies to individuals, partnerships, estates trusts, and S corporations. For additional information on these entities, refer to business structures.

It does not apply to corporations other than S corporations. In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether: You carry on the activity in a business-like manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on income from the activity for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You, or your advisors, have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years and the amount of profit it makes, and you can expect to make a future profit from the appreciation of the assets used in the activity.

For more tax tips and information, please contact Herman & Company CPA’s, accounting firm in White Plains, NY.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.