If you have children or grandchildren working this summer, opening a Roth IRA account in their name can give them a head start on their retirement savings. A Roth IRA is an individual retirement account which allows for after-tax contributions of earned income to grow tax-free with tax-free withdrawals during retirement. Parents or grandparents can open and maintain control of a Roth IRA account in the child’s name until the child reaches the age of majority, typically 18 years old. While they are able to fund it on the child’s behalf, contributions are capped at the lesser amount of the 2017 limit of $5,500 or the child’s earned income. For example, if the child earns $2,000 this summer, the maximum amount that can be contributed to the account is $2,000. It is also important to know that any contributions made by a parent or grandparent will count towards their $14,000 annual gift tax exclusion ($28,000 if married and splitting gifts).
There are many opportunities for financial growth and earnings when investing in a Roth IRA at a young age. Compounded interest has the power to build up the account value tax-free for years. Additionally, the earnings can be withdrawn tax-free after they are 59 ½ years old. Typically, an early withdrawal penalty of 10% is applied if the earnings are withdrawn from the account beforehand. However, there are some exceptions to this rule:
If you are looking to teach your children or grandchildren some valuable financial lessons about savings, opening a Roth IRA account is a great way to do so. Children can begin building wealth for their retirement while they are in a low or zero tax bracket. At the same time parents and grandparents have the opportunity to fund and manage the account while providing a more comfortable retirement for their children in the future. By having an adult contribute to the Roth IRA, children can receive the double benefit of keeping their summer earnings in addition to having money put away for their retirement.
For more information or questions, please contact Anatoli Pilchtchikov at 301.231.6200 or email@example.com.
Another government agency falls short in protecting personal data. A recent data breach to the Department of Education website’s Free Application for Federal Student Aid (FAFSA), has compromised the personal information of approximately 100,000 taxpayers. Parents and students had an option to use the IRS Data Retrieval Tool (DRT), which provided access to their income information from prior year tax returns and automatically filled in the applicable information on the FAFSA application.
Identity thieves used the personal information of individuals that they had obtained from outside the tax system to begin the FAFSA application process. The thieves further used the DRT to access adjusted gross income and other personal information to file fraudulent tax returns with the IRS. Currently, it’s estimated that up to 8,000 fraudulent returns were filed, processed, and completed. Furthermore, approximately $30 million in refunds were issued before the IRS shut down the tool in March.
The online FAFSA application remains available and operational; however, the DRT functionality will remain suspended for the 2016-17 and 2017-18 FAFSA application forms. The DRT should be available for the 2018-19 FAFSA application when the form launches on October 1, 2017. Taxpayers that have not completed the process of finalizing their FAFSA applications (2016-17 and 2017-18) must manually enter their 2015 tax information by obtaining copies of their 2015 tax returns or requesting IRS tax transcripts.
The IRS is currently working to identify the exact number of taxpayers affected by the FAFSA breach. As the IRS identifies those taxpayers with compromised personal information, it is flagging and locking down their accounts to provide an additional layer of protection against any fraudulent activity. Additionally, the IRS plans to notify any affected taxpayers by mail about possible identity theft concerns.
For more information or questions, please contact Anatoli Pilchtchikov at 301.231.6200.
Without providing any substantial detail or legislative text, earlier this week the White House presented a one-page document titled “2017 Tax Reform for Economic Growth and American Jobs”.
Here are some items that may affect individual taxpayers.
Three brackets may replace the existing seven-bracket structure. The new brackets would be set at 10%, 25%, and 35%.
The existing standard deduction could be doubled. Under the existing structure, individuals can deduct $6,350 and married couples can deduct $12,700.
The plan would limit itemized deductions to mortgage interest and charitable contributions. A very popular deduction for State and Local Income Taxes would no longer be available (taxpayers residing in high-tax jurisdictions will feel the most impact).
Tax Relief for Families with Child and Dependent Care Expenses
No detail was provided as to how or if the existing dependent care tax credit and child tax credit will be modified.
Although Treasury Secretary Steven Mnuchin said in his address Wednesday that the administration would like to move as fast as they can to pass the plan by year-end, the lack of transparency will lead to major congressional headwinds in the coming weeks and months.
For more information or questions, please contact Anatoli Pilchtchikov at 301.231.6200.
With President Trump recently taking over the Oval office, it will be interesting to see how quickly his administration can advance proposed tax legislation through Congress; considering it was a top priority during his campaign.
Over the coming weeks, the Trump administration should submit their fiscal year 2018 budget to Congress, which ought to provide further details on his proposals.
To understand the implications of the current tax reform proposals from both President Trump and House Republicans, below is a summary of the key provisions impacting individual taxpayers.
The year is coming to a close, and now is the time to take advantage of some tax saving opportunities including giving to family members or donating to charity.
Gifts under annual exclusion – under current law, single taxpayers can give up to $14,000 to any donee without being subject to gift taxes, a married couple can give up to $28,000. This annual exclusion applies to individual donees, so you can make a tax-free gift of $14,000 to any number of individuals without being subject to gift taxes.
Educational and Medical Payments – making payments directly to an educational institution for a person’s tuition (ex. children or grandchildren) do not count against the annual gift tax exclusion. Be cautious to not gift the student or individual the money for their tuition or else gift tax laws will apply. This same principle applies to medical expenses; you may pay an unlimited amount of medical expenses for any donee as long as the payments are made directly to the medical institution or doctor.
529 Plan Contributions – consider contributing to a 529 plan if you would like to help your children or grandchildren with education costs. Section 529 plans offer a special gifting feature that allows you to make a lump-sum contribution of up to five times the annual gift tax exclusion, which is $70,000 for an individual and $140,000 for a married couple. An election to spread the gift evenly over five years avoids federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period.
Roth IRA Contributions – if you have any working children, consider setting up and contributing to their Roth IRA. For 2016, you can contribute up to $5,500 or a maximum of the child’s 2016 earnings if they are less. These contributions will count toward your annual gift tax exclusion but the benefit of the Roth is that the contributions can be withdrawn tax-free at any time. The earnings generally cannot be withdrawn prior to age 59½ without paying the 10% early withdrawal penalty with the following exceptions:
Charitable Donations – when donating to charitable organizations, be sure to give appreciated assets and not property that has declined in value. If you have owned the appreciated property for more than one year, you can generally deduct the full fair market value at the date of gift, without the charity or you having to pay any income taxes on the appreciation. However, if you own property that has declined in value, sell the property, claim the capital loss on your tax return, then donate the proceeds from the sale.
There are many favorable tax gifting strategies that can be utilized for year-end tax planning. If you have any questions or are looking for assistance with your gifting strategies, please contact Aronson’s Anatoli Pilchtchikov, CPA, at 301.231.6200.