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Savings Bonds for Higher Education
One can take advantage of investing in
US savings bonds and treating the resulting interest income as tax-free
when the bonds are used to pay for college tuition.
The bond, only Series EE and Series I US
savings bonds qualify, must be issued to an individual at least 24 years
old. Therefore, the bond should be issued to you and not your child who
will be attending college. It can be owned jointly by you and your
spouse, but not jointly with anyone else.
For the interest to be tax-free, the
proceeds from the bond must be used for "qualified higher education
costs" for any individual who is your dependent (or for you or your
spouse). Costs which qualify include tuition or fees at a college or
graduate school. Room and board costs do not qualify.
If the bond proceeds exceed the
qualified expenses, only a proportionate share of the interest will be
excluded. For example, a qualifying bond is redeemed for $10,000,
including interest of $2,000. Of the $10,000, only $7,000 is spent on
qualified higher education costs. In this situation, 70% of the interest, or $1,400 is excludible and the balance
($600) is taxable.
Unfortunately, this interest income
exclusion is phased out for a taxpayer whose adjusted gross income (AGI)
in the year the bonds are redeemed is above a certain amount. For married
couples filing jointly, if the AGI in 2005 is more than $91,850 and less
than $121,850, a portion of the exclusion benefit is lost; if the AGI is
$121,850 or more, the exclusion is not available and all of the interest
is taxable. These threshold amounts are adjusted annually to reflect
inflation. (For unmarried taxpayers, the phase out of benefits start at
$61,200 of AGI in 2005 and increases until there are no benefits for AGI
of $76,200 or more.)
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Dear Reader,
As
summer begins, we still try to find ways to minimize or eliminate your
tax bite. This month, we discuss a new planning strategy involving the
sale of one's residence. It is IRS-approved; therefore, one should take
advantage, if at all possible.
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· Home Sale
Exclusion and Like-Kind Exchange Planning
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Previous
issues of our tax newsletter have discussed both the exclusion of gain on
sale of one's principal residence and the tax planning associated with
like- kind exchanges. Recently, the IRS issued a very taxpayer-friendly
rule that allows the use of both of these provisions, in a proper
situation, to avoid tax on the same transaction.
When
property is used as a principal residence and a business either
consecutively (e.g. used as a principal residence followed by rental of
the property) or concurrently (a portion of the home is used as a
principal residence and a portion is used as a home office), an exchange
of the home can qualify for both the home sale exclusion and Code Sec.
1031 like-kind exchange deferral treatment. The advantage of being able
to use the gain exclusion and the like-kind deferral in the same
transaction is two-fold: (1) tax can be avoided on gain that exceeds the
home sale maximum exclusion ($250,000 or $500,000), and (2) gain
attributable to post-May 6, 1997 depreciation, which cannot be excluded
under the home sale exclusion, can be deferred under the like-kind
exchange rules.
To
illustrate: Mr. X purchases a home for $210,000 and used it as his
principal residence from 2000 to 2004. From 2004 to 2006, he rents the
house to tenants and claims depreciation expense of $20,000. In 2006, he
exchanges the house for cash of $10,000 and a townhouse with a fair
market value of $460,000 that he intends to rent to tenants. Mr. X
realizes a gain of $280,000 ($470,000 realized less $190,000 adjusted tax
basis ($210,000 less $20,000 depreciation)) on the exchange and qualifies
for both tax breaks as follows: He applies the home sale exclusion to
exclude the maximum of $250,000 of the $280,000 gain and he can defer the
remaining $30,000 gain, including the $20,000 gain attributable to
depreciation, under the like-kind exchange rule. Although he received
$10,000 of boot in the exchange, it is not recognized currently for tax
purposes since this amount of cash is less than the amount of the
excluded gain, and thus, not currently taxable.
One who
is contemplating the disposition of a "mixed- use" residence
should consider utilizing these two combined tax planning strategies to
avoid a substantial tax on the realized gain on the transaction. Of
course, to do so, one must meet the complex requirements of each of these
two provisions. Careful planning is mandatory to accomplish this goal.
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· NYS New Hire Reporting Requirements
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The NYS New Hire reporting
program requires all employers to report within 20 calendar days of
hiring an employee certain identifying information about each newly hired
or rehired employee working in New
York State.
Beginning July 1, 2005, employers
must use the first day compensated services are performed by an employee
as the hiring date. This would be the first day any services are
performed for which the employee will be paid wages or other
compensation, or the first day an employee working for commissions is
eligible to earn commissions.
As a result of this change, the
rules relating to the hiring date included in Publication NYS-50 cannot
be used after June 30, 2005. After June 30, 2005, there is no longer an
option to choose one of the four dates listed in the NYS-50 as the hiring
date.
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· Taxation of Barter Income
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There are instances where a
business owner may find it to his/her advantage to barter goods for
services rather than paying cash. One should be aware that the fair
market value of the goods received is taxable income, just as if you had
received a cash payment.
Similarly, exchanges of services
result in taxable income for both parties. The amount of the income is
measured by the fair market value of the services received. This is the
amount they would have normally charged for the same services. If the
parties agree to the value of the services in advance, that will be
considered the fair market value, and the amount of income to be
reported, unless there is contrary evidence.
Business owners
who participate in a barter club, where "credit units" are
awarded to the members who provide goods and services, are taxed on the
value of credit units at the time they are added to their account, even
if not redeemed for actual goods and services until a later year. The
club will be required to provide you with a 1099 Form, showing the value
of cash, services, goods, etc. received. Of course, that amount will also
be reported to the IRS and must be included on your tax return.
You need to be aware of the tax
consequences of barter transactions. Simply avoiding payment for your
services, in the traditional way, does not alleviate your tax obligation
on the value of services/goods received.
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· Tax Deadlines
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July 15th is the tax deadline for
the filing of partnership returns, estate income tax returns and trust
returns that are on first extension from April 15th. An additional three
month extension of time to file until Oct 15th is available,
provided a reason is given for this further extension request.
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