Financial Focus – Income Tax Planning, Chapter 3 : Family & Education

Income Tax Planning 2014

Chapter 3- F A M I LY & E D U C A T I O N

Turn your saving tax dollars into a annual family tradition

2014 may be another good year for families to save taxes. Most of the child- and education-related tax breaks on the table the last several years are available once again to parents — or in some cases to grandparents or to students themselves. Make sure that you and your family are taking advantage of the credits, deductions and other tax-saving opportunities that apply to you. Savvy, strategic tax-related decision-making can become a family tradition, if it’s not already.

Child and adoption credits
Tax credits reduce your tax bill dollar-for-dollar, so make sure you’re taking every credit you’re entitled to. For each child under age 17 at the end of the year, you may be able to claim a $1,000 child credit.
If you adopt in 2014, you may qualify for an adoption credit — or for an income exclusion under an employer adoption assistance program. Both are $13,190 per eligible child.
Warning: These credits phase out for higher-income taxpayers. (See Chart )

Child care expenses
A couple of tax breaks can help you offset these costs:
Tax credit. For children under age 13 or other qualifying dependents, you may be eligible for a credit for a portion of your dependent care expenses. Eligible expenses are limited to $3,000 for one dependent and $6,000 for two or more. Income-based limits reduce the credit but don’t phase it out altogether. (See Chart)

FSA. You can contribute up to $5,000 pre tax to an employer-sponsored child and dependent care Flexible Spending Account. The plan pays or reimburses you for these expenses. You can’t use those same expenses to claim a tax credit.

IRAs for teens
IRAs can be perfect for teenagers because they likely will have many years to let their accounts grow tax-deferred or tax-free. The 2014 contribution limit is the lesser of $5,500 or 100% of earned income. Traditional IRA contributions generally are deductible, but distributions will be taxed. On the other hand, Roth IRA contributions aren’t deductible, but qualified distributions will be tax-free.
Choosing a Roth IRA is typically a no-brainer if a teen doesn’t earn income that exceeds the standard deduction ($6,200 for 2014 for single taxpayers), because he or she will likely gain no benefit from the ability to deduct a
traditional IRA contribution. See Case Study II for an illustration of just how powerful Roth IRAs for teens can be. 
If your children or grandchildren don’t want to invest their hard-earned money, consider giving them the amount they’re eligible to contribute — but keep the gift tax in mind.  If they don’t have earned income and you own a business, consider hiring them. As the business owner, you can deduct their pay, and other tax benefits may apply. Warning: The children must be paid in line with what you’d pay non family employees for the same work.

2014 family and education tax breaks: Are you eligible?

Tax break Modified adjusted gross income phase out range
Single fler.                                                    Joint fler
Child credit
$ 75,000 – $ 95,000                    $ 110,000 $ 130,000 
Adoption credit 
$ 197,880 – $ 237,880               $ 197,880 – $ 237,880 
Child or dependent care credit
$ 15,000 – $ 43,000                         $ 15,000 – $ 43,000 
ESA contribution 
$ 95,000 – $ 110,000                 $ 190,000 – $ 220,000 
American Opportunity credit 
$ 80,000 – $ 90,000                $ 160,000 – $ 180,000

Lifetime Learning credit 
$ 54,000 – $ 64,000             $ 108,000 – $ 128,000

Student loan interest deduction 
$ 65,000 – $ 80,000              $ 130,000 – $ 160,000

The “kiddie tax”
The “kiddie tax” applies to children under age 19 as well as to full-time students under age 24 (unless the students provide more than half of their own support from earned income).
For children subject to the tax, any unearned income beyond $2,000 (for 2014) is taxed at their parents’ marginal rate rather than their own, likely lower, rate. Keep this in mind before transferring income-generating assets to them.

529 plans
If you’re saving for college, consider a Section 529 plan. You can choose a prepaid tuition program to secure current tuition rates or a tax-advantaged savings plan to fund college expenses:
* Although contributions aren’t deduct- ible for federal purposes, plan assets can grow tax-deferred. (Some states do offer tax incentives, in the form of either deductions or credits.)
* Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, equipment, supplies and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well.
* The plans usually offer high contribution limits, and there are no income limits for contributing. 
* There’s generally no beneficiary age limit for contributions or distributions.
* You remain in control of the account,
even after the child is of legal age. 
* You can make tax-free rollovers to
another qualifying family member. 
* The plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions and make a $70,000 contribution (or $140,000 if you split the gift with your spouse).

The biggest downsides may be that your investment options — and when you can change them — are limited.

Roth IRAs: A powerful savings tool for teens
Roth IRAs can be perfect for teenagers — just look at how much difference starting contributions early can make: Both Ethan and Hannah contribute $5,500 per year to their Roth IRAs through age 66. But Ethan starts contributing when he gets his first job at age 16, while Hannah waits until age 23, after she’s graduated from college and started her career. Ethan’s additional $38,500 of early contributions results in a nest egg at full retirement age of 67 that’s nearly $600,000 larger!
Total contributions made 
Ethan: $280,500    Hannah: $242,000 

Balance at age 67
Ethan: $1,698,158    Hannah$1,098,669

Note: This example is for illustrative purposes only and isn’t a guarantee of future results. The figures presume $5,500 is contributed at the end of each year over the ages shown and a 6% rate of return.

Coverdell Education Savings Accounts (ESAs) are similar to 529 savings plans in that contributions aren’t deductible for federal purposes, but plan assets can grow tax-deferred and distributions used to pay qualified education expenses are income-tax-free. One of the biggest ESA advantages is that tax-free distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. ESAs are worth considering if you want to fund such expenses or would like to have direct control over how and where your contributions are invested.
But the $2,000 contribution limit is low, and it’s phased out based on income. Amounts left in an ESA when the beneficiary turns age 30 generally must be distributed within 30 days, and any earnings may be subject to tax and a 10% penalty.

Education credits and deductions
If you have children in college now, are currently in school yourself or are paying off student loans, you may be eligible for a credit or deduction:

American Opportunity credit.

This tax break covers 100% of thefirst $2,000 of tuition and related expenses and 25% of the next $2,000 of expenses. The maximum credit, per student, is $2,500 per year for the first four years of post secondary education. The credit is scheduled to be available through 2017.

Lifetime Learning credit.

If you’re paying post secondary education expenses beyond the first four years, you may benefit from the Lifetime Learning credit (up to $2,000 per tax return).

Tuition and fees deduction.

If you don’t qualify for one of the credits because your income is too high, you might be eligible to deduct up to $4,000 of qualified higher education tuition and fees — but only if this break is extended for 2014. (Check with your tax advisor for the latest information.)

Student loan interest deduction.
If you’re paying off student loans, you may be able to deduct the interest. The limit is $2,500 per tax return.
Warning: Income-based phase outs apply to these breaks and expenses paid with distributions from 529 plans or ESAs can’t be used to claim them.

For the next several weeks, join us in educating you to the world of Tax Planning, 2014, but please , contact your tax advisor to learn exactly which strategies can benefit you the most.

Chapter 3 FAMILY & EDUCATION (you are reading)
Chapter 5 BUSINESS
Chapter 8 TAX RATES

 Anthony Rivieccio is the founder & The CEO of The Financial Advisors Group, celebrating their 18th year as a fee only financial planning firm specializing in solving one’s financial problems. Anthony has been a recognized financial expert since 1986. He has been seen, heard or read by many national and local media outlets including: Klipingers Personal Finance Magazine, The New York Post, News12 The Bronx, Bloomberg News Radio, Bronxnet Channel 67 TV, The Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS1010 Radio, The Bronx News newspaper and The Bronx Chronicle. Anthony can be reached at 347.575.5045

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