Making Sense of College Savings

Saving for college is a daunting task. Over the past decade, tuition rates have been steadily rising and student financial aid is getting harder and harder to come by. The average college graduate had $26,500 of student loan debt in 2011, up almost 5% over the year before. To help ease the pain of rising tuition costs there are several college savings vehicles that help to save for college in tax-favorable ways. Let’s take a look at some of these plans.

A 529 plan is one of the most flexible ways to steadily save for college for your child, grandchild or other future student in your life. There are no income limitations on who can contribute to a 529 plan. Anyone can be an account owner and anyone can be a beneficiary. A contribution is considered a completed gift and is therefore excluded from a contributor’s estate. The contributions into the plan are not tax deductible but the earnings grow tax-free and there is no taxation on withdrawal as long as the withdrawal is used for qualified educational expenses.

529 plans fall under two categories – prepaid and savings. Prepaid plans lock in a tuition rate at an eligible public or private university. The contributions to the plan are only eligible to cover tuition and mandatory fees. Lump-sum installment plans are set up based on the beneficiary’s age and the number of years purchased; this is an advantage because it locks in lower tuition rate for the future. However, it impacts the student’s flexibility when choosing a university. Enrollment in these plans is also often limited to a certain time of year.  Read more

2012 Impact of California’s Prop 30

The people of California have spoken and Proposition 30 passed by a fair margin, roughly 54% to 46%. The question now is, “what does this mean for me?” In summary, Prop 30 means tax increases for all California taxpayers making over $250,000 per year (Single and Married Filing Separate filers) or $500,000 per year (Married Filing Joint and Head of Household filers.)

For Single and Married Filing Separate filers the new rates will be:

• 10.3% for taxable income between $250,001 and $300,000
• 11.3% for taxable income between $300,001 and $500,000
• 12.3% for taxable income above $500,000

For Married Filing Joint and Head of Household filers the new rates will be:

• 10.3% for taxable income between $500,001 and $600,000
• 11.3% for taxable income between $600,001 and $1,000,000
• 12.3% for taxable income above $1,000,000

In addition, the California mental health tax 1% surcharge on income over $1,000,000 remains in effect, so the top rate rises to 13.3% for these high earners.

These tax increases are retroactive to January 1, 2012 so planning now is essential to brace for higher balances due in April. With this new initiative passing combined with looming federal tax increases, planning this November and December is more important than ever! Contact your LMGW tax advisor right away to schedule an appointment.

Independent Contractor vs. Employee Status

Hiring an independent contractor is often the simplest way for a business to get help in the door. However, the IRS, state labor and employment boards, unemployment insurance and worker’s compensation authorities all investigate whether or not employers are properly classifying workers. If any of these authorities determine that a worker that is being treated as an independent contractor should actually be an employee the remedies to correct the misclassification can be costly.

There are many benefits of classifying a worker as an independent contractor such as not providing the contractor with employee benefits, avoiding employer payroll tax liability, the ability to budget a specific amount for a project without paying overtime or holiday pay, savings in clerical costs and recordkeeping, less liability, and savings on workers compensation and unemployment insurance. While a hired independent contractor and employer may be in agreement in regards to their status, the IRS or other authority could disagree if they deem the relationship falls under the definition of employer-employee.

If the IRS or other authority determines that a worker classified as an independent contractor is actually an employee it can prove costly—the employer will be liable for past employer payroll taxes as well as penalties and interest and the burden of filing or amending all necessary payroll tax returns. If the issue is serious enough court time and costs or even criminal sanctions could result. Also, any retirement plans or other benefit plans that require certain compliance could be invalidated. Read more

Private Company Council Established

In 2009 a study was conducted to address how the accounting standards can meet the financial statement reporting needs of US private companies. The study found that accounting principles generally accepted in the United States of America (GAAP) often address issues that are not relevant to smaller, less complex companies, including those that are not public. Some of the most costly and complex standards to implement for a small business were the least relevant and least useful for the reader of the financial statements. 

Many small private companies are normally only required to file income tax returns but lenders and bonding companies are requiring GAAP financials which the companies do not have the accounting resources to prepare. The cost of preparing the GAAP financials for these small private companies often exceeds the benefits.   

The newly established Private Company Council will work directly with the Financial Accounting Standards Board (FASB) to give recommendations of various modifications to GAAP that would be considered beneficial for the small private company. During the first few years the council will meet several times during the year and will be open to the public. Stay tuned for updates on changes to the financial statement reporting standards for private companies as the Private Company Council implements its recommendations.

Bracing yourself for higher taxes

In 2013 a slew of new and increased taxes are set to be unleashed on individual taxpayers. Two of these taxes are the result of the 2010 Health Care legislation and will directly impact many of our clients.

Beginning January 1, 2013 an additional 0.9% Hospital Insurance (HI) tax will be imposed on “high-income” taxpayers who are defined as single individuals with $200,000 or more of wages or self-employed income per year, $250,000 for married filing joint and head of household filing statuses and $125,000 for married filing separate individuals. This tax effectively raises the current employee-portion of the medicare tax from 1.45% to 2.35% for wages or self-employed income earned in excess of the above limitations. The additional tax is required to be withheld when an individual taxpayer’s wages are more than $200,000, but that does not take into account a spouse’s earnings. Situations in which both spouses work but neither reach the $200,000 level individually may find themselves owing an additional 0.9% on their salaries come tax time. An adjustment of current withholding levels may be necessary, especially in dual income households, for taxpayers that may be subject to this additional tax. Read more