In this edition of Buckingham Weekly Perspectives, Head of Investment Research Jared Kizer shares the latest updates on fixed income markets, interest rates and volatility.
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While 529 plans are a popular way to fund expensive college educations, Buckingham Senior Tax Manager Shawn Williamson shares more options that may benefit both students and parents from a tax standpoint.
According to a recent study, a year of tuition, books, supplies and day-to-day living expenses at a four-year university will cost on average $35,551. In addition, the price of college is rising at an alarming 7.1% annually. To combat these soaring prices, many parents prepare for their children’s education by investing in 529 plans. Through this strategy, tuition funds are taken directly out of the plan, and parents avoid paying capital gains tax on the appreciation of the investments in the educational fund. They may even get a state tax deduction for the contributions.
While many agree that the benefits of the 529 are of great support to parents, there can be a few nuances that affect your tax filings. College tuition can be utilized in four different ways on a tax return:
The same tuition dollar cannot be used twice, but the total tuition paid each year can be split up and used for different purposes. Furthermore, all of those options may be utilized on either the parent’s or the child’s tax return, conditional on the dependency situation.
Higher-income individuals may be able to take advantage of four underutilized opportunities:
Determine if your child should be claimed as a dependent on your tax returns
First, it’s important to establish whether or not your college-aged child should be claimed as a dependent on your tax returns. When married parents have more than $180,000 in adjusted gross income (AGI), they cannot claim the AOTC or the Lifetime Learning Credit. Those with AGI in excess of $410,000 don’t even get the basic $500 credit for dependents older than 17. For parents who do not receive a tax benefit from claiming their child as a dependent and do not qualify for financial aid, it may be more advantageous to remove the child from the parents’ tax return.
A child is classified as independent if they are providing at least half of their own support through working a part-time or summer job or spending their own savings for room and board. They may also be taking out significant student loans in their own name or covering a huge portion of tuition by way of scholarships. If this is the case, the child has an opportunity to claim the AOTC on their own tax return. For the parents, a $2,500 tax credit might be irrelevant, but to a college student it may be a gold mine and at least worth considering.
Have distributions go directly to the school
Parents may pay college costs out of their personal checking accounts and then request reimbursement from the 529 plan later. As a tax professional, I recommend having those distributions go directly to the university. If the costs are reimbursed, the 1099-Q distribution will show up under the parent’s Social Security number (the reimbursement recipient). If the tuition is sent straight to the university, 1099-Q distributions usually show up under the child’s Social Security number (the beneficiary). If the parent is audited, there should be no debate or need for investigation of whether or not the distributions were qualified since they went straight to the school. Also, if the child claims herself or himself, then all of the college-related numbers can go on the child’s return: tuition, scholarships, 529 distributions and the AOTC. If the child happens to have taxable scholarships because their tuition was used to get the AOTC, they will likely be taxed at a much lower rate than the parent (possibly 0%).
Consider using the Lifetime Learning Credit before and after a bachelor’s degree
Since the American Opportunity Credit is only good for four tax years, normally you will want to use it during the child’s full-time pursuit of a bachelor’s degree. However, a lot of students these days are taking classes for college credit during high school. Many taxpayers do not know that they can use the Lifetime Learning Credit to benefit from those early part-time college classes. Likewise, if your child goes on to pursue a master’s degree or takes longer than four years to get a bachelor’s degree, this credit can continue to benefit the parents or the student after the AOTC expires.
Continue investing after your student begins college
Many parents are falsely under the assumption that if the child has already started college, it’s too late to make 529 contributions. In fact, contributions can even be made a week before the distributions are needed. While there is little time to earn tax-free investment growth, you may still be able to get a state tax deduction of 5% to 10%. In that scenario, it is best to invest the 529 contributions in a cash option to avoid the unnecessary risk of short-term loss.
About the author:
As a Senior Tax Manager at Buckingham Strategic Wealth, Shawn helps clients with tax planning and reviews returns prepared by the firm. Along with reviewing 20,000 individual and business tax returns in his lifetime, he has authored dozens of tax and finance related articles and has written the book “Big Success in Small Business”. He was named 100 St. Louisans You Should Know to Succeed in Business by St. Louis Small Business Monthly.
While the cost of higher learning is at record levels, there are several ways to fund your child’s education while receiving tax benefits. If you need assistance with this complicated issue or have questions, reach out to your advisor.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this document. R-23-4998
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At Lauterbach, we understand the importance of incorporating a safe fixed income investment strategy into your portfolio. In this edition of Buckingham Weekly Perspectives, Chief Investment Officer Kevin Grogan shares our philosophy on fixed income investing, why it’s important to deemphasize credit risk and a historical examination of taking such risks.
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With so many people in need, financially supporting non-profits is more important than ever. In this edition of Buckingham Weekly Perspectives, Chief Planning Officer Jeffrey Levine shares three reasons why donor advised funds are a great way to support your favorite charities while still receiving a tax break.
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The strong emotions associated with the death of a spouse can become even more amplified by the overwhelming host of financial issues that need to be addressed. Where does one start?
Losing a spouse is a life-changing event that married couples unfortunately need to be prepared for. Since survivors are faced with the daunting tasks of dealing with strong emotions while addressing immediate needs, oftentimes finances are put on the backburner. These are the times when your wealth advisor and other estate planning professionals can provide support. I have helped many clients navigate the financial complexities that occur after the death of a spouse, and my goal is not only to help manage necessary housekeeping tasks, but also to empower the survivor who may have never handled these important matters before.
If you are in this position, it can be difficult to know where to start, what needs to be done and the timeline for settling an estate. While many concerns don’t need to be addressed immediately, I often recommend that a helpful starting point can be in accessing all safety deposit boxes to secure essential documents and review the financial wishes of your spouse.
Next, it is important to reach out to your accountant, financial planner and/or attorney to let them know of your spouse’s passing. Oftentimes , you can inform the professional you are most comfortable with, and they will notify the others. This team of trusted professionals will be able to handle many necessary tasks and provide guidance. The first thing they will likely do is prepare a list of items to be completed by each family member, along with a timeline to help guide and set priorities. The team may also start gathering and organizing the documents you will need in the coming weeks.
If feasible, I recommend meeting with your team in a comfortable space such as your home or their office. It may be beneficial to have a close family member or friend join the meeting for support. Having multiple sets of ears listening to the conversation can be extremely helpful and make the process feel less overwhelming.
It is perfectly normal to not know what to ask or expect during that initial meeting. While your advisor will welcome all questions, here are some considerations to begin the conversation:
After the meeting, both you and your advisors will have a clearer outline of the next steps needed.
While the list of things to accomplish may seem lengthy, approaching them one at a time at a manageable pace can help you from feeling overwhelmed. Lean on your professionals to help guide you.
For additional resources, I encourage you to review our detailed What to do After the Death of a Loved One and Personal Document Checklist pieces. From record maintenance to insurance issues, these handy documents can help you maneuver through the red tape and paperwork.
The difficult emotions associated with the death of a spouse are often even more intensified by the overwhelming host of financial issues that need to be addressed. If you need assistance navigating this challenging time or have questions, reach out to your advisor.
About the author:
As a wealth advisor, Jada Diedrich spends time getting to know clients personally and professionally. She feels forming strong relationships enhances her ability to help clients define and achieve their goals. Away from Buckingham, she is a member of the American Institute of Certified Public Accountants and the Missouri Society of Certified Public Accountants.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-23-4997
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The arithmetic of active management is a simple investment concept that can be used to enhance portfolio performance. In this episode of Buckingham Weekly Perspectives, Head of Investment Research Jared Kizer explores this idea, explains the two types of investors and shares the possible costs of active management.
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The end of last year brought some big changes, so we kicked off 2023 with a recap of important planning considerations. Chief Planning Officer Jeffrey Levine, CFP®️, CPA, PFS, CWS, AIF mentioned that we are still processing the huge impact of SECURE Act 2.0. passing in December, which introduced nearly 100 changes affecting retirement planning. In the webinar, he answered questions from clients about the implications of some of the changes.
Chief Investment Officer Kevin Grogan, CFA, CFP®️ shared his thoughts on what markets are expecting from the Federal Reserve this year on the pace of interest rate increases. He pointed out that monetary policy works with a lag, and the economy won’t start seeing the full effects from rate increases for six to 18 months. However, there are some early signs that higher rates are slowing parts of the economy, and many economists are predicting a recession this year.
The good news for markets – it’s been a solid month year to date. All stock markets have delivered positive returns so far this year, with international markets outpacing the U.S. market. Kevin reminded clients that despite the predictions for a recession this year, the markets are forward-looking and are discounting potential future earnings and dividends well into the future.
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When recession risks grow, normally that can lead to lower profits for businesses. For business owners, if your profit margin is razor thin or nonexistent, you sure can’t afford to lose funds to fraud, theft or overcharges. Most business owners I’ve met don’t think about those risks until after they have a problem. As an auditor for over 25 years, I observed dozens of ways that people steal and commit fraud. Part of my job was to help business owners design controls to safeguard their assets. Here are some common things to watch out for and ways to prevent them from happening to your small business.
Unauthorized credit and debit card use. This is a common problem when your employees are running around with company credit cards. They buy $400 worth of legitimate business supplies at Costco on the company card, plus an extra $100 worth for themselves. As a control procedure, you should examine all credit card activity monthly, or maybe even weekly, to make sure it all looks legitimate. However, some of this fraud can only be discovered at the invoice level. Make sure there are receipts or invoices to back up all credit card and debit card charges, and spend a little time reviewing those. If you see something questionable, start making phone calls.
Hacked business debit card transactions. Besides employees, you have to watch out for criminals that swipe your debit card number and start buying things. I’ve learned the hard way that banking laws provide almost no protection for business debit cards. Any restaurant, gas station or retail store in which you have used your card may have a security breach that puts your whole business account balance at risk. The fraudsters simply use a fake business name to run extra charges through your debit card. If you don’t discover and protest the charges fast enough (my bank allowed only two days), you lose the stolen money. Fortunately, my lesson only cost $30. Now I have a business credit card instead of a debit card, which offers much better protection and a longer period to protest.
Diverting business revenue. Nobody ever thinks about the possibility of someone stealing checks made out to their business. Yet, it can be done, and it’s not too hard. The thief just sets up another bank account in the name of the company they work for at a new bank down the street. Then they grab legitimate revenue checks out of the mail and deposit them at the new account no one else knows about. Sometime weeks or months down the road, they can distribute money to themselves, as the only signer on the account. So, make sure the revenue you expect to receive actually makes it to your bank account.
Misdirected checks. If you have an outsourced bookkeeper writing your checks, believe it or not, some have been known to pilfer their client’s money. One way to do that is to write checks to themselves and then enter the checks in the books as though they were written to someone else, such as a power company. One small business owner told me that his bookkeeper was using his checks to buy personal items at Sam’s. I once discovered an in-house accountant paying all of her personal water, sewer, gas and power bills with company checks. We also came across a situation where a small-town clerk was giving himself an extra $9,000 check each month and cashing it at a bank in the next town. Bottom line, examine your check images from the bank each month and the receipts that back them up to make doubly sure that your checks are going to the right places.
Returning parts or supplies for cash refunds. Again, this is something employees can do pretty easily. They can buy unneeded equipment or supplies and just return the extra items for cash or credit a couple of weeks later. So, make sure you receive and retain all the small equipment and supplies you paid for.
Getting charged for the same thing multiple times. For example, in the past, my firm was charged twice for a shipment of toner cartridges. If we hadn’t noticed it, we would have paid double. I’ve seen this happen many times to my clients for repair bills, insurance premiums and other items – mostly by “mistake.” You know you ordered the item, so you errantly pay the bill twice if it was presented to you twice. One time a local school district in the St. Louis area errantly paid an architect over $1 million twice, and he kept the money permanently. Whether you are guarding against error or fraud, be on the lookout for two or more identical bills for the same item.
Completely fake invoices. Some years ago, I received a $120 invoice in the mail for four cases of duct tape. For half a minute, it seemed legitimate. Then I decided that there was no way I ordered that much duct tape. In fact, I had not ordered any duct tape at all. The culprit was just sending out fake invoices to random companies, hoping that they would pay without any questions. I’m sure many did. So, take a little time to review your incoming invoices, and do not assume they are all legitimate.
Finally, I always keep in mind a phrase that Ronald Reagan made famous: Trust but verify. If one of your trusted vendors asks why you are re-counting those boxes of supplies, just tell the vendor that you know humans make mistakes, and therefore you don’t trust anyone fully, not even yourself.
My list above is certainly not comprehensive, but I hope it has given you several things to think about and watch out for while managing your small business and safeguarding your assets.
As a Senior Tax Manager at Buckingham Strategic Wealth, Shawn helps clients with tax planning and reviews returns prepared by the firm. Along with reviewing 20,000 individual and business tax returns in his lifetime, he has authored dozens of tax and finance related articles and has written the book “Big Success in Small Business”. He was named 100 St. Louisans You Should Know to Succeed in Business by St. Louis Small Business Monthly.
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