Tried and True Tax Planning Opportunities for Everyone by Carolyn Flaherty

The tax environment is unstable at best. Economic pressures are calling for an overall reform and many advantageous provisions are expiring. There has been talk of such fundamental and actively used advantages such as the mortgage interest expense deduction being eliminated. As such, tax planning for 2011 and future years is complex at best, (unless you happen to be in possession of a fantastic financial advisor utilizing a crystal ball). However, there are some tried and true strategies that are likely to stand the test of time and make good sense both from a tax and financial standpoint.

Always contribute the maximum amount every year to your 401K. All contributions are tax deferred and many companies have a matching program which equates to FREE MONEY!

Consider spousal Individual Retirement Account's (IRA's), and/or maximizing your deductible contribution to an IRA. Contributions can be made to an IRA and deducted as long as they are made by the due date of your return. Therefore, your tax preparer can determine your maximum deduction while compiling your return and if you are lucky enough to get a refund, you can use that to offset your IRA contribution.

If your company offers a “cafeteria plan” you should consider participating at maximum allowable levels. Cafeteria Plans are a type of employee benefit plan that allow participants to choose from a variety of benefits. Contributions to cafeteria plans are generally taken out of your payroll as pre-tax deductions and are not usually subject to Social Security and Unemployment taxes. Examples of benefits often available in a Cafeteria Plan include group-term life insurance, flexible spending accounts, and health care benefits among others.

Charitable contributions are a wonderful way to lower your tax liability and feel good at the same time. Start keeping receipts in a file for the year and remember you are also required to obtain evidence of non-cash donations.

Does your company offer equity compensation? Asking for equity as a portion of your compensation or bonus compensation in the form of equity verse cash may defer taxable income if there is qualified plan in place.

Energy efficient home improvements may offer rebates as well as tax credits or deductions. If you are considering any projects, look at state and federal websites to determine if you are eligible for rebates and/or tax savings.

Planning to go back to school or saving for your childs' education? Use a tax deferred plan such as a 529 Plan. Contributions to 529 education plans are not deductible; however the money (both principal and interest) comes out tax free as long as the beneficiary is attending a qualified secondary education program. The accounts can also be rolled over to another beneficiary. Therefore if you are fortunate enough to have a full scholarship for one of your children, their savings account can be rolled to another of your children or saved and eventually rolled to a grandchild.

Tax Benefits Used for Education by Karla Hopkins

Taxpayers must take advantage of any opportunities to reduce their educational costs. The most advantageous tax benefits are the six exclusions for educational benefits that would otherwise be taxable. They are as follows:

Employer-Provided Educational Assistance- An employee's gross income does not include amounts paid for educational assistance to the employee if there is an employer plan. The exclusion is currently limited to $5,250 per year. This does not benefit the employee's spouse or dependents.

Qualified Scholarships and Tuition Reductions- Qualified scholarships include any funds that the individual receives as a scholarship or fellowship grant that are used for qualified tuition and related expenses. It is important to remember that this provision is NOT allowed for scholarships that are designated for room, board, and travel expenses. An employee of an educational organization can receive free or reduced tuition for undergraduate studies. This provision is available for a spouse and dependents of the employee.

Education Savings Bond Program- Interest from Series EE Bonds used to pay qualified higher education expenses can be excluded from income if the bond was issued after December 31, 1989, to an individual who is 24 years old before the date of issuance. The education can be for the taxpayer's spouse and dependents. There is an income limit for this benefit.

Coverdell Education Savings Accounts- Distributions from these accounts are not taxable to the extent they do not exceed the qualified education expenses. This includes the original contribution to the account and the accumulated tax free interest. These accounts can help avoid the “kiddie tax” too since the interest earned on these accounts, while in the student's name, is not subject to the “kiddie tax” reporting requirements.

Exception to Early Withdrawal Penalty of IRA Distributions- Distributions from IRA's if taken before the age of 59 1/2 are generally subject to a 10% penalty. However, if the distribution is used to pay for qualified higher education expenses it is excluded from this penalty provision. With the economic downturn and the rising cost of education, many taxpayers are turning to their retirement savings to fund education and can do so without a penalty under this provision.

529 Plans- Distributions from 529 Plans are exempt from tax if they are used to pay a beneficiary’s qualified higher education expenses. 529 Plans are very flexible and allow anyone to contribute. The plans are a good tool to transfer assets to multiple family members and multiple generations.

In the end, taxpayers should evaluate the alternatives to education funding well before the first day of school in order to make use of tax-saving and cost-saving measures.

The Benefits of a College Planner by Karla Hopkins

As a parent of a high school junior, I faced the sudden question, "Have I planned for my child's college education costs adequately?"

Even though I have been an accountant for over 20 years, I still questioned whether or not I had the right information and tools to get me through the college years without permanent financial scars. Knowledge is power and college financial planning is daunting without the right tools. I realized that even with my extensive accounting and tax expertise, there were many areas of college planning that I was unaware of; so I turned to a professional college planner for advice.

It is projected that the average four year college education could cost between $90,513 and $181,025. If your student hopes to attend an Ivy League institution, that number could be north of $200,000 or more!

Professionals in the college planning business offered me the following:

• How my assets and income can count against me when applying for financial aid, and what I can do about it.
• What it will take to position my student to be the best candidate for more gift aid (Free Money) and fewer loans.
• Which assets are considered when the US Department of Education calculates my Expected Family Contribution (EFC) – (the absolute minimum colleges will expect a family to pay for one year of school).
• How preparing the financial aid applications the right way can maximize financial assistance and minimize out of pocket expenses.
• How I can get ahead by developing a customized college plan for all of the college costs I will incur.

As your accountant, I am able to work closely with a college planner to assist you in implementing a college financing plan. Even though you may feel overwhelmed by the process, you should not avoid digging into the details. Knowledge is power and with that comes success. It is never too early to start a college plan, but you could face the situation where it is too late. My recommendation is to do some research on your own to familiarize yourself with a college's financial requirements, visit the federal and state college financial aid websites, and value the expertise of a college planner.

Meet Karla Hopkins: Managing member of PRR

I am a managing member of PRR and specialize in corporate and individual tax planning and compliance. My professional experience includes four years with Ernst & Young, LLP and twenty years with the firm of Pavento, Ratcliffe, Renzi & Co., LLC.

I graduated from the University of Massachusetts with a Bachelors’ Degree in Accounting and have also earned a Masters’ Degree in Taxation from Bentley College.

During my work day I face numerous challenges from "being the bearer of bad news" when a taxpayer has a tax balance due, to assisting them in reaping the rewards of a good tax plan. What I enjoy most about my career is getting to know the families of my clients. I can say that I have experienced both the joy of birth and the sorrow of death with many. Connecting with my clients is rewarding to me in a personal way and I enjoy being a partner in their personal and professional lives.

When I am not working, I am volunteering in the community. At times you will find me preparing tax returns for many local nonprofit leagues, baking for local bake sales, exercising my active dog in the state parks, or at the podium of the town meeting as the Chairman of the Finance Committee. I live the motto of giving back to the community both as a professional and as a member of a community at large. Being a partner of a firm like PRR supports this lifestyle allows me to grow as a professional and as a volunteer.