investments

6 FAQs About 529 College Savings Plans

College is a large expense and one worth planning for, especially if you want your future college graduate to start their lives with minimal debt. One common way to prepare for such an expense is to open a 529 college savings plan.

Photo by Ruijia Wang on Unsplash

Photo by Ruijia Wang on Unsplash

What is a 529 plan?

College savings 529 plans are state-sponsored savings accounts that offer both tax and financial aid benefits.

What states run a 529 program?  

Almost every state has a 529 program, each with different perks and benefits. You can pick based on perks and you don’t need to live in the state you opened the account in.

You can look at 529 plan options using this tool from SavingforCollege.com.

What are the two types of college 529 plans?

There are two types of 529 plans, they are:

  • College savings plans – This plan is similar to a Roth 401k or Roth IRA by allowing you to contribute after-tax income in the form of mutual funds and other types of investments. There are a number of investment options to choose from and the 529 account will go up and down and value according to those investment choices. The money is this account is available for tuition, books, and often housing.

  • College prepaid tuition-  This plan can be used to pre-pay all or part of the costs of an in-state public college education. Sometimes, they can be converted for use at private or out-of-state colleges.

What are the perks of using a 529 savings plan?

Each state provides slightly different incentives for its 529 programs. But some of the overall benefits include:

  • Large income tax breaks (for federal and often state taxes)

  • The donor stays in control of the account until its use

  • They’re low maintenance

When can you start them?

You can start one of these savings plans at any time. Most 529 programs are “set it and forget it” meaning the investments come straight out of your paycheck or bank account.

Where can I learn more about college 529 plans?

There are a lot of online resources for comparing and ranking different 529 programs. You can reference one of these, or reach out to your friendly neighborhood tax professionals. We can help you select the best option for you.

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4 Ways to Pay Less Taxes on Your Investments

If you’re considering jumping into investing (or have already started), you need to know the tactics to avoid paying massive amounts of taxes on them. We’ve compiled a list of tax tips for investors. Check them out.

by Austin Distel

Hold investments for longer than a year

Whenever you make money off your investments (aka capital gains) you are taxed on that income. However, the length of time you held the investment dictates the rate you’ll be taxed at.

These taxes, called capital gains taxes, change at the year mark. If you hold your investments for a year or less, you’ll be taxed at the short term capital gains rate, which is the same rate as income tax.

But if you hold your investments for a year and a day, you’ll get taxed at a more manageable long-term capital gains rate.

This rate can get as high as 20% for big earners, but it’s more likely you’ll pay somewhere between 0 and 15%.

Buy Municipal Bonds  

Buying bonds means you get to collect interest on those bonds, which is a great source of passive income if you buy enough.

But unless you buy municipal bonds, the IRS is entitled to a share of that interest. When you buy either city, state, or county bonds, you are exempt from paying federal income tax on those bonds. If you buy municipal bonds in your home state, you’ll be exempt from state and local taxes as well.

One thing to note is that if you sell your municipal bonds for a profit, you’ll have to pay taxes on the gain.

Sell Losing Investments   

If you’re losing money on a particular investment, you might want to consider selling it off.  Investment losses offset capital gains, so if you make $2,000 and lose the same amount, you won’t have to pay on the amount you’ve lost.

In addition, if your investment losses exceed your gains, you can use them to offset up to $3,000 in taxable income.

Put Your Money in Tax Sheltered Accounts  

Putting your investment money into tax-sheltered accounts is a great way to defer paying taxes on various investments.

Accounts like 401(k)s, 403(b)s, and certain IRA plans aren’t tax-free, but you won’t have to worry about paying taxes until you start making withdrawals. By the time you do that (barring some emergency), you’ll likely be in a lower tax bracket anyway.

 

Have more questions about investments and taxes? Shoot us an email or give us a call.

Taxing a Child’s Investment Income

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

Taxing a Child’s Investment Income

Some children who receive investment income are required to file a tax return and pay tax on at least a portion of that income (and possibly at the parents’ marginal tax rate). This is often referred to as the kiddie tax. The kiddie tax cannot be computed accurately until the parents’ income is known. Thus, the child’s return may have to be extended until the parents’ return has been completed. Additionally, if the parents’ return is amended or adjusted upon IRS audit, the child’s return could require correction (assuming the changes to the parental return affect the tax bracket). If a child cannot file his or her own tax return for any reason, such as age, the child’s parent or guardian is responsible for filing a return on the child’s behalf.

There are tax rules that affect how parents report a child’s investment income. Investment income normally includes interest, dividends, capital gains, and other unearned income, such as from a trust. Some parents can include their child’s investment income on their tax return. Other children may have to file their own tax return. Special rules apply if a child’s total investment income is more than $2,000. Finally, the parents’ tax rate may apply to part of that income instead of the child’s tax rate.

Note: Higher income individuals subject to the 3.8% net investment income tax (3.8% NIIT) may benefit from shifting income to and having their child claim investment income on the child’s tax return. This may be advantageous because the child receives his or her own $200,000 exclusion from the 3.8% NIIT.

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

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.