Getting Started

Before estimating your quarterly tax payments, you must gather some information. The types of information you will need to complete your estimates will depend on whether your company is a pass-through entity or a corporation. Some of the items you are likely to need to include are:

• Your total personal income, including dividends, pension, etc.
• Your estimated business income for the upcoming year, which may be based on the previous year’s earnings.
• Your estimated expenses based on your last year and expected increases.
• Your calculated self-employment tax, if applicable.¹

Calculating Your Estimated Taxes

There are a couple of ways that you may calculate your estimated tax payments. If you are not as confident or comfortable with tax matters, you may want to ask your tax preparer to run an estimate based on your previous tax return. If you know your numbers well and have completed your tax returns before, you may feel comfortable filling out Form 1040-ES from the IRS to calculate your payments. A final option to consider if you are using small business tax software is running out of estimates when you prepare your return for the year. These estimates will be based on your previous return and deductions you will likely have in the upcoming year.²

Making Your Quarterly Payments

Once you have completed your 1040-ES form, you enter the payment amounts for each quarter on the blank vouchers and mail them with your check to the address listed on the form. If you are set up for payment in the Electronic Federal Tax Payment System, you may enter your information and payment directly online. This is an excellent option as it confirms payment immediately.¹

Payments are due four times a year and need to be postmarked by the following dates:

• April 15
• June 15
• September 15
• January 15

It is important to note that if you end up having a more profitable year than expected, you always have the option of increasing the estimated taxes in the next quarter. The taxes paid don’t have to reflect the same amount each quarter.

Making Sure You Pay Enough

Ultimately, you will want to pay enough each quarter so that you don’t owe any taxes or only owe a small amount by the end of the year. The main way to work toward this is by paying 110% of the taxes you estimate you may owe and then applying any overage to the next tax year. If your cash flow is a little tight, and you don’t expect to make as much this year, you may go as low as 90% but could possibly face an underpayment penalty. If you are on track to make the same amount or slightly more then 100% of your previous tax liability should put you in a good position.²

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

LPL Tracking #503492-02

Footnotes:

¹ Self-Employed Individuals Tax Center, IRS.gov, https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center

² Quarterly Taxes, The Basics, SBA.gov, https://www.sba.gov/blog/quarterly-taxes-basics

The post How to Estimate Your Quarterly Taxes as a Small Business Owner  appeared first on Tribox Private Wealth.

As a small business owner, your employees are the heart and soul of your organization. Many entrepreneurs understand the importance of a diverse, inclusive workforce and the benefits it brings, not just to the business, but to the community at large.

Your commitment to hiring practices that uplift veterans, marginalized communities, and those facing barriers to employment is commendable. But did you know the federal government offers incentives that can support and reward these practices?

Beyond the satisfaction of providing jobs and supporting community members, there are tangible financial incentives available for businesses.

Four Credits and Incentives

Here are four credits and incentives that can make a significant difference:

Employee Retention Tax Credit: The ERC was born out of the need to address economic challenges stemming from the Covid-19 pandemic. If your business has faced disruptions, but you’ve worked hard to keep your team together, this credit offers a financial cushion. By retaining your staff during these trying times, you may qualify for this advantageous tax break.

Work Opportunity Tax Credit: Are you looking to expand your team? The WOTC offers an opportunity to benefit from hiring within 10 specific groups facing employment barriers.

This credit not only helps decrease your tax liability but also supports the broader goal of workforce diversity and inclusion. With its recent extension until December 31, 2025, there’s ample opportunity for businesses to take advantage of this incentive.

Differential Wage Payment Credit: If you’re an employer who continues to pay employees while they’re on active military duty, this credit is for you. You could be eligible for a credit amounting to 20% of up to $20,000 of differential wage payments for each qualifying employee. This initiative supports businesses that stand by their employees who have chosen to serve the country.

Paid Family and Medical Leave Credit: Recognizing the importance of work-life balance and the need for time off during critical life events, this tax credit is designed for employers offering paid family and medical leave. By supporting your employees during moments that matter most, you’re not just nurturing a positive work environment, but also receiving financial rewards for doing so.

Thriving Together

Being a business owner is more than just profit margins and balance sheets – it’s about nurturing a community, fostering growth, and making a positive impact. The above incentives underline the fact that when businesses take care of their employees and the community, everyone wins.

If you’re already utilizing these practices, ensure you’re availing these credits. If not, consider them as avenues to further your community support while benefiting your business.

As always, it’s essential to consult with tax professionals to ensure compliance and optimize the benefits of these incentives.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

This article was prepared by FMeX.

LPL Tracking #1-05377832

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Understanding Capital Gains

First, having a good understanding of the concept of capital gains is crucial. In simple terms, a capital gain is the increase in value of an investment or real estate beyond its purchase price. However, this gain is unrealized until the investment sells. The resulting profit from a sale is taxed at a rate that depends on how long the investment was held. Capital gains taxes apply only to capital assets, which include stocks, bonds, digital assets like cryptocurrencies and NFTs, jewelry, coin collections, and real estate.

The current tax law provides for two types of capital gains: short-term capital gains for assets held for less than one year and long-term capital gains for assets held longer than one year.

Be Aware of Tax Laws

Tax law changes must be an essential part of your year-end planning because it determines the amount of taxes you may be obligated to pay. Financial and tax professionals can help you prepare for recent tax law changes that may impact your situation.

For the 2023 tax year, individual filers won’t pay any capital gains tax if their total taxable income is $44,625 or less. The rate jumps to 15 percent on capital gains if their income is $44,626 to $492,300. Above that income level, the rate climbs to 20 percent.

For 2024, it’s anticipated that the capital gains rates will not change, but the income brackets for the rates will change.

Tax-efficiency

A key element of tax planning is understanding and implementing strategies to help minimize taxes. One tax-efficient strategy involves timing the sale of your assets to help capitalize on the federal tax code’s distinction between long-term and short-term capital gains. For example, if an investment has been held for one year and one day, it qualifies for the lower long-term capital gains rate. Depending on the situation, an investor may hold off on selling an investment if approaching that one-year mark since doing so may help lower their overall tax bill.

Focusing on tax-efficient investing is also vital. Tax-efficient investing involves using strategies designed to help manage tax liability. These strategies may include investing in tax-efficient fund options, index funds and exchange-traded funds (ETFs), or asset location – a strategy that involves placing investments that may generate more taxable income into tax-advantaged accounts.

Offsetting Capital Losses

Capital loss offsetting is another component of the year-end tax planning strategy. Capital losses result when you sell an investment for less than what you paid. The losses can then be used to offset capital gains to help manage the overall taxable income. Be mindful, however, that the IRS has restrictions on “wash sales,” which occur if you sell a security at a loss and then buy the same or substantially identical security within 30 days before or after the sale.

In conclusion, year-end tax planning is essential for managing capital gains. Discussing your situation with financial and tax professionals can help mitigate your tax liability and potentially increase your investment’s net return. Remember, the key is not only about how much your investments earn but also how much you keep after taxes.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

LPL Tracking #491273-04

Sources:

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Taking the time to learn about the 2020 pandemic tax changes may make a difference. Some laws have extensions into 2021 for eligible tax credits and deductions. Here is a tax planning list for small-business owners preparing for year-end tax filings. Incorporating these tips into monthly, quarterly, and annual tax planning routines may prevent errors, could help you avoid delays and may help to manage stress levels for small-business owners.

Get Organized

Early tax planning may help integrate monitoring and reporting practices that authenticate small business year-end tax liability. Small businesses that qualified for one of the federal assistance programs must ensure that the information complied is accurate to take advantage of the tax credits.

Reconcile All Business, Credit, and Bank Accounts

Following the end of each month, these reports should support the final tax reports and the entity’s financial statements. Start by cross-referencing and reviewing expense classifications. Deductible expenses may be forgotten or incorrectly classified.

The process gives an overview of an entity’s taxes and financial condition — valuable information for possibly making good business decisions.

Payroll Tax, Credits, and Deductions

Payroll data reports sent to federal, state, and local agencies need to be verified and accurate. Submissions include withholding information for each employee used for computing a company’s tax obligations. Depending on the state of residence, states have specific payroll form numbers, filing frequency and due dates. Be sure to check the submission dates to remain compliant. Late or inaccurate reporting may come with penalties.

IRS submission schedules are quarterly. Small businesses must report income, Social Security, wages and workers’ compensation, unemployment and Medicare taxes.

In 2020, Form W-4 changes were enforced for new and current employees withholding revisions. 2020 also brought changes for non-employee compensation requiring FORM 1099-NEC to report paid services of $600 or more. Not to be confused with the Form 1099-MISC that reports other paid income.

2021 Pandemic Tax Credits

The Taxpayer Certainty and Disaster Tax Relief Act, enacted December 7, 2020, changed employee retention tax credits for small-business owners. Under the Coronavirus Aid, Relief and Economic Security Act, the Employee Retention Credit extended benefits into the first two quarters of 2021.

Eligible employers should have received the allowable tax credits on payroll liabilities for the first two quarters of 2021 as a refundable tax credit against the employer’s share of Social Security payments equal to “70% of the qualified wages they paid to employees after Dec. 31 2020, through June 30 2021.” The Internal Revenue Service says, “qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.”

A second tax credit program for eligible employers is the American Rescue Plan Act, enacted in March 2021 for ERC wages paid during the third and fourth quarters of 2021. ARPA guidelines are available from the Department of the Treasury and the IRS.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

LPL Tracking # 1-05188522

Sources:

Depositing and Reporting Employment Taxes | Internal Revenue Service (irs.gov)
https://www.irs.gov/businesses/small-businesses-self-employed/depositing-and-reporting-employment-taxes

New law extends COVID tax credit for employers who keep workers on payroll | Internal Revenue Service (irs.gov)
https://www.irs.gov/newsroom/new-law-extends-covid-tax-credit-for-employers-who-keep-workers-on-payroll

IRS provides guidance for employers claiming the Employee Retention Credit for first two quarters of 2021 | Internal Revenue Service
https://www.irs.gov/newsroom/irs-provides-guidance-for-employers-claiming-the-employee-retention-credit-for-first-two-quarters-of-2021

Treasury, IRS provide additional guidance to employers claiming the employee retention credit, including for the third and fourth quarters of 2021 | Internal Revenue Service
https://www.irs.gov/newsroom/treasury-irs-provide-additional-guidance-to-employers-claiming-the-employee-retention-credit-including-for-the-third-and-fourth-quarters-of-2021

The post 4 Year-End Tax Planning Tips for Small-Business Owners  appeared first on Tribox Private Wealth.

3 Ways Small Businesses Can Donate to Charities

While cash donations are one of the most common ways to give to charities, small businesses may also provide support in other ways.

1. Volunteering

Instead of donating money, your business will be able to make an impact by donating their time to a local charity, such as a soup kitchen or homeless shelter.¹

2. Host a Charity Drive

If you see a need in their local community, consider helping by starting a drive to collect needed items, such as a holiday toy drive or canned food drive.¹

3. Take Advantage of Local Sponsorship Opportunities

Local youth organizations and groups are often looking for sponsorship. Consider sponsoring a sports team or local community event. You will also get a little advertising and community goodwill out of your involvement.¹

Tips for Small Business Giving

While there are no set rules on how or how much you should give to charity, below are a few helpful tips to help your business get started.

Find a Cause That is Meaningful to Your Company or Employees

All types of charities are looking for support, which means it is easy to find one that resonates with your business culture and employees. This way, you will be more personally connected to your contribution, which will mean something to you and your employees.²

Research Charities You Are Interested In

Take some time to learn about the different charities you may wish to contribute to. Through some research, you will be able to find out how much of the contributions go into their programming, what kind of services they provide to the community, and the impact your donation may have. This will give you a clearer picture of how you are helping through your contribution.²

Build a Relationship With Your Chosen Charities

Even if you only contribute to your charity once a year, you want to stay connected and find out other ways you are able to assist throughout the year. This is a great way to stay connected with your community, network, and build relationships with other businesses.²

Get Your Employees Involved

Have your employees volunteer with the charity or offer contribution matching for employees who donate independently. This will help your employees connect with the charity and provide the charity with much-needed assistance throughout the year.²

It is important to remember that every dollar counts for charities, so even if your business only contributes a small amount, it will still be making a huge impact on the community.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

LPL Tracking #1-05377994

Footnotes:

¹ “Small Business Guide to Charitable Giving and Tax Deductions,” Business News Daily, https://www.businessnewsdaily.com/10470-small-business-guide-charity-donations.html

² “Six Best Practices For Small Businesses To Give Charitably,” Forbes, https://www.forbes.com/sites/krisputnamwalkerly/2018/12/17/6-best-practices-for-small-businesses-to-give-charitably/?sh=60dcdffa2c98

The post Charitable Giving: How Small Business Owners Can Make a Big Impact  appeared first on Tribox Private Wealth.

529 plans

Since their creation in 1996, 529 plans have become to college savings what 401(k) plans are to retirement savings — an indispensable tool for saving money for a child’s or grandchild’s college education. That’s because 529 plans offer a unique combination of benefits.

There are two types of 529 plans — savings plans and prepaid tuition plans. Though each is governed under Section 529 of the Internal Revenue Code (hence the name “529” plans), savings plans and prepaid tuition plans are very different savings vehicles.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing; specific plan information is available in each issuer’s official statement. There is the risk that investments may not perform well enough to cover college costs as anticipated. Also, before investing, consider whether your state offers any favorable state tax benefits for 529 plan participation, and whether these benefits are contingent on joining the in-state 529 plan. Other state benefits may include financial aid, scholarship funds, and protection from creditors.

529 savings plans

The more popular type of 529 plan is the savings plan. A 529 savings plan is a tax-advantaged savings vehicle that lets you save money for college and K-12 tuition in an individual investment-type account, similar to a 401(k) plan. Some plans let you enroll directly, while others require you to go through a financial professional.

The details of 529 savings plans vary by state, but the basics are the same. You’ll need to fill out an application, name a beneficiary, and select one or more of the plan’s investment portfolios to which your contributions will be allocated. Also, you’ll typically be required to make an initial minimum contribution, which must be made in cash.

529 savings plans offer a unique combination of features that no other education savings vehicle can match:

Federal tax advantages: Contributions to a 529 account accumulate tax deferred and earnings are tax free if the money is used to pay the beneficiary’s qualified education expenses. (The earnings portion of any withdrawal not used for qualified education expenses is taxed at the recipient’s rate and subject to a 10% penalty.)

State tax advantages: Many states offer income tax incentives for state residents, such as a tax deduction for contributions or a tax exemption for qualified withdrawals. However, be aware that some states limit their tax deduction to contributions made to the in-state 529 plan only.

High contribution limits: Most plans have lifetime contribution limits of $350,000 and up (limits vary by state).

Unlimited participation: Anyone can open a 529 savings plan account, regardless of income level.

Wide use of funds: Money in a 529 savings plan can be used to pay the full cost (tuition, fees, room and board, books) at any college or graduate school in the United States or abroad that is accredited by the Department of Education, and for K-12 tuition expenses up to $10,000 per year.

Professional money management: 529 savings plans are offered by states, but they are managed by designated financial companies who are responsible for managing the plan’s underlying investment portfolios.

Flexibility: Under federal rules, you are entitled to change the beneficiary of your account to a qualified family member at any time as well as roll over (transfer) the money in your account to a different 529 plan once per calendar year without income tax or penalty implications.

Accelerated gifting: 529 savings plans offer an estate planning advantage in the form of accelerated gifting. This can be a favorable way for grandparents to contribute to their grandchildren’s education while paring down their own estate, or a way for parents to contribute a large lump sum. Under special rules unique to 529 plans, a lump-sum gift of up to five times the annual gift tax exclusion amount ($16,000 in 2022) is allowed in a single year, which means that individuals can make a lump-sum gift of up to $80,000 and married couples can gift up to $160,000. No gift tax will be owed, provided the gift is treated as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years.

Transfer to ABLE account: 529 account owners can roll over (transfer) funds from a 529 account to an ABLE account without federal tax consequences. An ABLE account is a tax-advantaged account that can be used to save for disability-related expenses for individuals who become blind or disabled before age 26.

Variety: Currently, there are over 50 different savings plans to choose from because many states offer more than one plan. You can join any state’s savings plan.

But 529 savings plans have a couple of drawbacks:

No guaranteed rate of return: Investment returns aren’t guaranteed. You roll the dice with the investment portfolios you’ve chosen, and your account may gain or lose value depending on how the underlying investments perform. There is no guarantee that your investments will perform well enough to cover college costs as anticipated.

Investment flexibility: 529 savings plans have limited investment flexibility. Not only are you limited to the investment portfolios offered by the particular 529 plan, but once you choose your investments, you can only change the investment options on your existing contributions twice per calendar year. (However, you can generally direct how your future contributions will be invested at any time.)

529 prepaid tuition plans

Prepaid tuition plans are cousins to savings plans — their federal tax treatment is the same, but their operation is very different. A 529 prepaid tuition plan lets you prepay tuition at participating colleges, typically in-state public colleges, at today’s prices for use by the beneficiary in the future. Prepaid tuition plans are generally limited to state residents, whereas 529 savings plans are open to residents of any state. Prepaid tuition plans can be run either by states or colleges, though state-run plans are more common.

As with 529 savings plans, you’ll need to fill out an application and name a beneficiary. But instead of choosing an investment portfolio, you purchase an amount of tuition credits or units, subject to plan rules and limits. Typically, the tuition credits or units are guaranteed to be worth a certain amount of college tuition in the future, no matter how much college costs may increase between now and then.

However, if your child ends up attending a college that doesn’t participate in the plan, prepaid plans differ on how much money you’ll get back. Also, some prepaid plans have been forced to reduce benefits after enrollment due to investment returns that have not kept pace with the plan’s offered benefits.

Even with these limitations, some college investors appreciate not having to worry about college inflation each year and want to lock in college tuition prices today. The following table summarizes the main differences between 529 savings plans and 529 prepaid tuition plans:

Coverdell education savings accounts

A Coverdell education savings account (Coverdell ESA) is a tax-advantaged education savings vehicle that lets you save money for college, as well as for elementary and secondary school (K-12) at public, private, or religious schools. Here’s how it works:

• Application process: You fill out an application at a participating financial institution and name a beneficiary. Depending on the institution, there may be fees associated with opening and maintaining the account. The beneficiary must be under age 18 when the account is established (unless he or she is a child with special needs).

• Contribution rules: You (or someone else) make contributions to the account, subject to the maximum annual limit of $2,000. This means that the total amount contributed for a particular beneficiary in a given year can’t exceed $2,000, even if the money comes from different people. Contributions can be made up until April 15 of the year following the tax year for which the contribution is being made.

• Investing contributions: You invest your contributions as you wish (e.g., stocks, bonds, mutual funds, certificates of deposit) — you have sole control over your investments.

• Tax treatment: Contributions to your account grow tax deferred, which means you don’t pay income taxes on the account’s earnings (if any) each year. Money withdrawn to pay college or K-12 expenses (called a qualified withdrawal) is completely tax free at the federal level(and typically at the state level too). If the money isn’t used for college or K-12 expenses (called a nonqualified withdrawal), the earnings portion of the withdrawal will be taxed at the beneficiary’s tax rate and subject to a 10% federal penalty.

• Rollovers and termination of account: Funds in a Coverdell ESA can be rolled over without penalty into another Coverdell ESA for a qualifying family member. Also, any funds remaining in a Coverdell ESA must be distributed to the beneficiary when he or she reaches age 30 (unless the beneficiary is a person with special needs).

Unfortunately, not everyone can open a Coverdell ESA — your ability to contribute depends on your income. To make a full contribution, single filers must have a modified adjusted gross income (MAGI) of less than $95,000, and joint filers must have a MAGI of less than $190,000. And with an annual maximum contribution limit of $2,000, a Coverdell ESA can’t go it alone in meeting today’s college costs.

Custodial accounts

Before 529 plans and Coverdell ESAs, there were custodial accounts. A custodial account allows your child to hold assets — under the watchful eye of a designated custodian — that he or she ordinarily wouldn’t be allowed to hold in his or her own name. The assets can then be used to pay for college or anything else that benefits your child (e.g., summer camp, braces, computer). Here’s how a custodial account works:

• Application process: You fill out an application at a participating financial institution and name a beneficiary. Depending on the institution, there may be fees associated with opening and maintaining the account.

• Custodian: You also designate a custodian to manage and invest the account’s assets. The custodian can be you, a friend, a relative, or a financial institution. The assets in the account are controlled by the custodian.

• Assets: You (or someone else) contribute assets to the account. The type of assets you can contribute depends on whether your state has enacted the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). Examples of assets typically contributed are stocks, bonds, mutual funds, and real property.

• Tax treatment: Earnings, interest, and capital gains generated by the account are taxed to your child each year under special “kiddie tax” rules that apply when a child has unearned (passive) income. Under the kiddie tax rules, a child’s unearned income over a certain threshold ($2,300 in 2022) is taxed at parent income tax rates. The kiddie tax rules generally apply to children under age 18 and full-time college students under age 24 whose earned income doesn’t exceed one-half of their support.

A custodial account provides the opportunity for some tax savings, but the kiddie tax reduces the overall effectiveness of custodial accounts as a tax-advantaged college savings strategy. And there are other drawbacks. All gifts to a custodial account are irrevocable. Also, when your child reaches the age of majority (as defined by state law, typically 18 or 21), the account terminates and your child gains full control of all the assets in the account. Some children may not be able to handle this responsibility, or might decide not to spend the money for college.

U.S. savings bonds

Series EE and Series I bonds are types of savings bonds issued by the federal government that offer a special tax benefit for college savers. The bonds can be easily purchased from most neighborhood banks and savings institutions, or directly from the federal government. They are available in face values ranging from $50 to $10,000. You may purchase the bond in electronic form at face value or in paper form at half its face value.

If the bond is used to pay qualified education expenses and you meet income limits (as well as a few other minor requirements), the bond’s earnings are exempt from federal income tax. The bond’s earnings are always exempt from state and local tax.

In 2021, to be able to exclude all of the bond interest from federal income tax, married couples must have a modified adjusted gross income of $128,650 or less at the time the bonds are redeemed (cashed in), and individuals must have an income of

$85,800 or less. A partial exemption of interest is allowed for people with incomes slightly above these levels.

The bonds are backed by the full faith and credit of the federal government, so they are a relatively safe investment. They offer a modest yield, and Series I bonds offer an added measure of protection against inflation by paying you both a fixed interest rate for the life of the bond (like a Series EE bond) and a variable interest rate that’s adjusted twice a year for inflation. However, there is a limit on the amount of bonds you can buy in one year, as well as a minimum waiting period before you can redeem the bonds, with a penalty for early redemption.

Roth IRAs

Though technically not a college savings account, some parents use Roth IRAs to save and pay for college. In 2022, you can contribute up to $6,000 per year. Earnings in a Roth IRA accumulate tax deferred. Contributions to a Roth IRA can be withdrawn at any time and are always tax free. For parents age 59½ and older, a withdrawal of earnings is also tax free if the account has been open for at least five years. For parents younger than 59½, a withdrawal of earnings — typically subject to income tax and a 10% premature distribution penalty — is spared the 10% penalty if the withdrawal is used to pay for a child’s college expenses.

But not everyone is eligible to contribute to a Roth IRA — it depends on your income. In 2022, if your filing status is single or head of household, you can contribute the full amount to a Roth IRA if your MAGI is $129,000 or less. And if you’re married and filing a joint return, you can contribute the full amount if your MAGI is $204,000 or less.

Financial aid impact

Your college saving decisions can impact the financial aid process. Come financial aid time, your family’s income and assets are run through a formula at both the federal level and the college (institutional) level to determine how much money your family should be expected to contribute to college costs before you receive any financial aid. This number is referred to as your expected family contribution, or EFC. Your income is by far the most important factor, but your assets count too.

Note: Starting with the 2024-2025 FAFSA, the term “student aid index” (SAI) will replace EFC on the FAFSA. The change attempts to clarify what this figure actually is: an eligibility index for student aid, not an exact dollar amount of what a family can or will pay for college.

In the federal calculation, your child’s assets are treated differently than your assets. Your child must contribute 20% of his or her assets each year, while you must contribute 5.6% of your assets. For example, $10,000 in your child’s bank account would equal an expected contribution of $2,000 from your child ($10,000 x 0.20), but the same $10,000 in your bank account would equal an expected $560 contribution from you ($10,000 x 0.056).

Under the federal rules, an UTMA/UGMA custodial account is classified as a student asset. By contrast, 529 plans and Coverdell ESAs are counted as parent assets if the parent is the account owner. In addition, student-owned or UTMA/UGMA-owned 529 accounts are also counted as parent assets. For 529 plans and Coverdell accounts that are counted as parent assets, distributions (withdrawals) from the account that are used to pay the beneficiary’s qualified education expenses are not counted as parent or student income on the federal government’s aid form, which means that the money is not counted again when it’s withdrawn.

However, the situation is different for grandparent-owned 529 plans and Coverdell accounts. If a 529 plan or Coverdell account is owned by a grandparent instead of a parent, the account isn’t counted as a parent asset — it doesn’t count as an asset at all.

However, money withdrawn from a grandparent-owned account is counted as student income, and student income is assessed at 50% in the federal aid formula.

Note: Starting with the 2024-2025 FAFSA, distributions from a grandparent-owned 529 plan will no longer be counted as student income.

Other investments parents may own in their name, such as mutual funds, stocks, U.S. savings bonds, certificates of deposit, and real estate, are also classified as parent assets. However, the federal government doesn’t count retirement assets at all in its financial aid formula, so Roth IRAs aren’t factored in to aid eligibility.

Regarding institutional aid, colleges generally dig a bit deeper than the federal government in assessing a family’s assets and their ability to pay college costs. Most colleges use a standard financial aid application that considers assets the federal government might not, for example, home equity. Typically, though, colleges treat 529 plans, Coverdell accounts, UTMA/UGMA custodial accounts, U.S. savings bonds, and Roth IRAs the same as the federal government.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal professional.

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This article was prepared by Broadridge.

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• If you have income from working in retirement.
• If you are self-employed.
• If you receive interest, dividends, or other taxable income.

You may pay SS tax if you:

• File an individual federal tax return, and if your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.
• File a joint federal tax return, and you and your spouse have a combined income between $32,000 and $44,000; you may have to pay income tax on up to 50% of your benefits. If you have more than $44,000 in income, up to 85% of your benefits may be taxable.
• Are married and file a separate tax return, you may have to pay SS taxes.

Source: SSA.gov

There are strategies to help you reduce SS taxes by minimizing your adjusted gross income (AGI). Depending on your situation, you may have these options available to you:

1. Minimize withdrawals from tax-advantaged vehicles. Withdrawals from your IRA or 401(k) will be considered income and subject to taxes. Decreasing the frequency or only taking the minimum amount, for example, the required minimum distribution (RMD), can help reduce your AGI.

2. Keep your income below the SS tax threshold. If your AGI is under $25,000 as an individual or under $32,000 combined income when filing jointly, you may be SS tax-exempt. Due to the complexities of taxation, visit your tax professional about your situation.

3. Use a Roth IRA conversion strategy. Roth IRAs have tax-free distributions and no RMDs. Use this strategy to convert IRAs, 401(k)s, and other tax-deferred vehicles to tax-free income in retirement. You will need to pay taxes at the rollover transfer, so you should consult your tax professional before converting your IRA, 401(k), or other tax-advantaged accounts to understand your situation.

Earnings on the Roth IRA that accumulate after the rollover will be eligible for tax-free withdrawal when the Roth IRA has been open for at least five years and you are at least 59½.

4. Donate to charity. Your RMDs can be donated, eliminating the income from your AGI for the donation. Another strategy called a qualified charitable distribution (QCD) allows you to distribute funds from your IRA to an eligible charity (a 501(c)(3) organization) if you’re age 70 1/2 or older.

5. Reduce your business income. Reducing your pass-through income by increasing business deductions and expenses can help lower SS taxes. You can maximize your retirement savings using specific strategies and lower your taxable income simultaneously. Work with your financial and tax professionals for business planning to determine which tax-saving strategies are appropriate for your situation as a business owner.

6. Maximize your capital losses. If you’ve invested and lost value, you may want to sell the investment and realize the loss so you can claim it on your taxes through a tax-loss-harvesting strategy. The tax write-off may provide a deduction on your taxes. Your financial and tax professionals can help you understand how capital losses work and if you qualify.

While there is no way to eliminate paying taxes, your financial and tax professionals can help determine strategies that may save you money depending on your circumstances.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

LPL Tracking # 1-05359383

Sources:

https://faq.ssa.gov/en-us/Topic/article/KA-02471#:~:text=You%20must%20pay%20taxes%20on,income%E2%80%9D%20of%20more%20than%20%2432%2C000.

https://www.bankrate.com/retirement/avoid-paying-taxes-on-social-security-income/#htm

https://money.usnews.com/money/retirement/social-security/articles/how-to-minimize-social-security-taxes

https://www.sdfoundation.org/news-events/sdf-news/new-laws-for-qcds-changes-for-cgas-and-smart-charitable-strategies-for-2023/#:~:text=Eligibility%20for%20making%20a%20QCD,liability%20for%20future%20estate%20taxes

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