Chapter 8: Education and Able Planning. 1 08: Education & Able Planning

Transcription

1 Page Chapter 8: Education and Able Planning 1

2 Learning Objectives Page Upon completion of this seminar, participants should be able to Identify the deduction, credits, exclusions, and investments allowable for education expenses. Describe savings opportunities and planning strategies related to financing the cost of college. List the advantages of using ABLE accounts. 2

3 Key Developments Page Updated Thresholds for Education Benefits. Page The requirements of Form Page 107 The importance of maintaining credit records. Page 107 The PATH Act provided math error authority to IRS for the AOTC. Page 110 The PATH Act added due diligence penalties to the AOTC. Page 110 The AOTC can only be claimed on timely filed returns. Page 110 3

4 Key Developments Page HEED deduction has expired. Page 111 Expanded reporting requirements for Form 1098-T by institutions delayed. Page 112 Information requirements expanded on Form 1098-T. Page 112 Discussion on the election to allocate scholarships to taxable income. Page 113 An expanded discussion on student loan discharge. Page Using proceeds of Education Savings Bonds to fund 529 plan is a QHEE. Page 123 4

5 Key Developments Page Income submissions have changed for FAFSA reporting. Page 131 An expansion of the number of states with ABLE Plans. Page 131 Tax benefits of ABLE funding for different states. 5

6 II. College Facts Costs Continue to Rise but More Slowly Page 103 trends.collegeboard.org/college-pricing/figurestables/average-estimated-undergraduate-budgets

7 II. College Facts Costs Continue to Rise but More Slowly But total financial assistance has grown at a rate of only 5.7% annually over the last ten years Page 103 7

8 II. College Facts Costs Continue to Rise but More Slowly However the cost of college on the average is currently 3.1 times what it was ten years ago. Page 103 8

9 III. Education Related Tax Incentives Page 104 9

10 IV. Income Levels Comparison for Benefits Page

11 V. Common Provisions of Education Credits and Deductions The decision of which credit/deduction is best can be confusing, let your software do the work when it can. Page

12 VI. Common Provisions of AOTC and Lifetime Learning Credit Form 8863 Must be completed in total for each student Page

13 VI. Common Provisions of AOTC and Lifetime Learning Credit Each student is allowed the Hope/AOTC up to four times and four times only. Careful consideration should be given to: Amount of QTRE each year, (See election Page 113). Number of years expected to be a student. Consumption of Credits Page

14 VII American Opportunity Tax Credit Page 107 The Basics % of first $2,000 in expense 2. 25% of next $2,000 in expense Maximum credit is $2,500 but limited to 4 years 14

15 VII American Opportunity Tax Credit Page 108 An eligible student is one who: 1. Enrolled for at least one academic period 2. At least ½ time Only required to meet this standard for one academic period in the year. 15

16 VII American Opportunity Tax Credit Page 110 For 2017 the AOTC (All Hope is gone): IRS has math correction authority for AOTC, i.e. they can change amounts they deem incorrect. There is a preparer due diligence penalty associated with AOTC credits of $510. Complete Form Must be made on a timely filed return and have an identification number, i.e. no late ITINs. 16

17 VIII. Lifetime Learning Credit Page 111 The lifetime learning credit for anybody at anytime for qualified tuition and fees. 17

18 IX. Higher Education Expense Deduction Page

19 Page 112 IRC 6095S(d) X T Reporting A student MUST receive a Form 1098-T or equivalent AND Tax Preparer must retain a copy of that for their files Failure to adhere to IRC 6095S(d) will subject the practitioner to a $510 per occurrence due diligence penalty. 19

20 Page 112 X T Reporting There are some exceptions to the rules of IRC 6050S(d): a. Failure to receive a 1098-T by January 31st, and b. Has requested a statement but has failed to receive the statement, and c. Has fully cooperated with the education institution, or d. The education institution isn t required to file a statement, or e. Guidance that has been published to the contrary. f. Until the proposed regulations are finalized and the taxpayer has proof of qualified expenses. 20

21 Page 112-Bonus X T Reporting IRS issues Prop Reg. 1.25A (1, 2, &5), Prop. Reg S-1 and Prop. Reg Two rules here to be noted: 1. An institution will be required to indicate on Form 1098-T the number of months the student was considered to be a full time student. 2. Ordering rules for the determination of payments made for current year. These rules will take affect after finalization. 21

22 Page 112 X T Reporting The new regulations are suppose to solve our dilemma of the 1098-T not really meaning anything for the return. IRS Announcement Delayed the requirement to report paid amounts versus billed amounts until reporting year 2018 See Item 3 exceptions regarding our issues. 22

23 Page 112 X T Reporting We were hoping for paid amounts versus billed amounts on Form 1098-T but what do we have. 23

24 Page 112 X T Reporting We were hoping for paid amounts versus billed amounts on Form 1098-T but The scheduled information will allow the tax return to be correctly filed, not the difference in the amount paid from amount billed, complying with the statute. 24

25 Page 112 X T Reporting Additional requirements of Form 1098-T 1. There must be a contact number of someone who can explain what each number on the Form represents. 2. What exactly is reported on the statement. 3. A reminder that actual amounts paid not billed are the amounts to be used on return. 4. A statement regarding the status of grants and/or scholarships. 25

26 Page 113 X T Reporting In the absence of documents that can be relied on for tax return reporting: D. Cautiously use information on Form 1098-T. E. Not all payments appear to be what they represent. F. Allocation of scholarships and grants are based on determination by institution, not the best interests of the student/parents. 26

27 Tax Planning is Critical to Preserve Education Tax Benefits When a client s child receives a scholarship that relieves the parent of any tuition payments we should: By a show of hands: A. Congratulate the parent for their talented child. B. Report the scholarship income on the parent s return. C. Consider making an election to tax some or all of the scholarship proceeds. D. Report the elected scholarship income on the child s return. E. C and D, maybe A too : Education and Able Planning

28 XI. New: Election to Allocate Scholarships and Grants as Taxable Income (IRC 117) It has been estimated by education oversight groups that the failure to make the election under IRC 117 affects 9-10 million students annually. The following example demonstrates how the institution will normally allocate scholarships and grants per IRC 117 Page

29 XI. New: Election to Allocate Scholarships and Grants as Taxable Income (IRC 117) Many scholarships/grants are available to pay the expense at the student s discretion. In the event there is no restriction by the award, consider the following: Page

30 XI. New: Election to Allocate Scholarships and Grants as Taxable Income (IRC 117) The student makes an election by including $3,000 of scholarship normally excludable under IRC 117 as taxable. The $3,000 is eligible for the earned income exclusion. Page

31 XI. New: Election to Allocate Scholarships and Grants as Taxable Income (IRC 117) The Facts: Parents - AGI of $100,000 Taxable Income of $76,800 Before Credit Tax of $10,505 Child- AGI of $5,000 (Summer Job) Scholarship of $4,000 Page

32 XI. New: Election to Allocate Scholarships and Grants as Taxable Income (IRC 117) Type Here Parent No Election Parent Election Student - Election Wages Tax Svgs. $5,000 Elected Amt. $1,335 $3,000 AGI $100,000 $100,000 Tax Income $75,150 $75,150 Tax $10,340 $10,340 Less Credit $1,000 Net Tax $9,340 $2,500 $7,840 $8,000 $1,650 $165 $165 Page

33 Page 115 XII. Student Loan Interest Deduction A. Interest on any qualified loan C. Up to $2,500 subject to phase-out limits Filing Status MFJ/Surviving Spouse $135,000 - $165,000 Single and HH $65,000 - $80,000 $135,000 - $165,000 $65,000 - $80,000 F. A qualified education loan is one that: 1. Incurred solely for qualified education expenses 33

34 XII. Student Loan Interest Deduction Page If not taxpayer s SSN and name best practice get copy of loan agreement 34

35 XIII. New: Student Loan Debt Forgiveness and Reduced Payments Can a student loan be discharged: Yes but it is difficult, there are many loan forgiveness programs that can be found at studentloanhero.com/start-here/ Page

36 XIII. New: Student Loan Debt Forgiveness and Reduced Payments There are several income based plans to reduce payments, see ibrinfo.org Page

37 XIII. New: Student Loan Debt Forgiveness and Reduced Payments Bankruptcy can be an option but the debtor must demonstrate: Page

38 XIII. New: Student Loan Debt Forgiveness and Reduced Payments Note programs under 20 USC 1087(c), the closed school discharge program: 1. Corinthian College 2. American Career Institutes No 1099-C is required but tell that to the lender, if received in error file Form 982 to claim the exemption. Page

39 XIV. Ordinary and Necessary Business Expense The question has been what education is to necessary to maintain or improve current skills Page 119 It is a Loser Taxpayer failed to demonstrate direct connection to current occupation 39

40 XIV. Ordinary and Necessary Business Expense Page 120 The question has been what education is to necessary to maintain or improve current skills It is a LOSER Despite taxpayer s beliefs Qualified for a New Occupation 40

41 Page XVIII. Education Savings Bonds Problem Taxpayer purchased bonds to facilitate college savings but now finds their AGI increasing and expects to be unable to qualify for savings bond exclusion. 41

42 XX. Traditional and Roth IRA Distributions for Education Page vs 42

43 Page XXI. Qualified Tuition Programs (QTP) The Good Large amounts can be transferred for estate planning providing opportunities to immediately fund education. Investment gains can be tax free when withdrawn for qualified education. The PATH Act permanently liberalize the ability to purchase computer and technology access as a qualified expense. 43

44 Page XXI. Qualified Tuition Programs (QTP) The Bad 529 programs are state based, each state running its own show. No federal tax deduction for contributions with confusing rules for state tax deductions. Some states punish participants in their plan that do not attend college in the state. Withdrawals for non-qualified purposes are subject to tax and penalty. 44

45 XVIII. Financial Aid Considerations and Calculation The EFC Formula: 50% student s income + 22%-47% parent s income + 20% student s assets * + 2.6% - 5.6% parent s assets * * Note: Assets valued at date of FAFSA submission Page

46 XXII. Financial Aid Considerations and Calculation Page 131 Effective with the FAFSA new tax return periods apply. 46

47 XXIII. ABLE Accounts Page 131 The Achieving a Better Life Experience accounts were created by TIPA in 2014 starting for tax years in Looks a lot like a IRC 529 Plan A tax advantaged savings plan for the disabled, i.e. the beneficiary will remain eligible for governmental benefits such as SSI and Medicaid 47

48 XXIII. ABLE Accounts Several states have now sponsored ABLE accounts: Page

49 XXIII. ABLE Accounts Page 131 D. Beneficiaries of ABLE accounts will be able to receive tax free benefits from the account if: 1. Are in fact disabled ((See IRC 529A(e)(1) for definitions), and 2. Have documentation that disability condition had an onset before age 26, and 3. Have obtained a disability certification. 49

50 XXIII. ABLE Accounts Page 131-Bonus Many states have deductibility of contributions to ABLE Plans. A great comparison of state by state plans can be found at And 50

51 XXIII. ABLE Accounts Page 132 The account works this way: G. Limited to tax free gift amount, currently $14,000. H. ABLE benefits in excess of $100,000 will be considered an asset subjecting the beneficiary to the loss of SSI benefits. I. Form 5498-QA will report any contributions. 51

52 XXIII. ABLE Accounts Page 132 Exercise care as: 1. Excess contributions are subject to a 6% excise tax. 2. Rollovers are permitted to another eligible individual. 3. Non-qualified withdrawals are subject to a 10% excise tax. 52

53 Page Bonus XXIV. Where to Go For More Information 53