Can you believe a Tax Increase of 30% over the next two years? The Congressional Budget Office says – Yes!

Can you believe a Tax Increase of 30% over the next two years?  The Congressional Budget Office says – Yes!

Could the battle to minimize taxes and maximize the profitability of your business get any more challenging?  You may not think its possible, but the Congressional Budget Office (“CBO”) answer this question with a resounding “YES!!”

According to the Budget and Economic Outlook published by the CBO last week, the amount of money the federal government takes out of the U.S. economy in taxes will increase more than 30% between 2012 and 2014.  At the same time, logic and the CBO suggest the economy will remain sluggish – partly because of the higher taxes.

The CBO report states: “In particular, between 2012 and 2014, revenues in CBO’s baseline shoot up by more than 30 percent,” said CBO, “mostly because of the recent or scheduled expirations of tax provisions, such as those that lower income tax rates and limit the reach of the alternative minimum tax (AMT), and the imposition of new taxes, fees, and penalties that are scheduled to go into effect.”

“The pace of the economic recovery has been slow since the recession ended in June 2009, and the Congressional Budget Office (CBO) expects that, under current laws governing taxes and spending, the economy will continue to grow at a sluggish pace over the next two years,” said CBO. “That pace of growth partly reflects the dampening effect on economic activity from the higher tax rates and curbs on spending scheduled to occur this year and especially next. Although CBO projects that growth will pick up after 2013, the agency expects that the economy’s output will remain below its potential until 2018 and that the unemployment rate will remain above 7 percent until 2015.”

According to the CBO report, federal tax revenues equaled $2.302 trillion in fiscal 2011, and will increase to $2,523 trillion in fiscal 2012, $2,988 trillion in fiscal in 2013, and $3,313 trillion in 2014.

In dollar terms, the anticipated increase in federal tax revenue from fiscal 2011 ($2.302 trillion) to fiscal 2014 ($3.313 trillion) is $1.011 trillion. That is an increase of 43.9 percent.

From just 2012 to 2014, the increase in federal tax revenues from $2.523 trillion to $3.313 trillion equals $790 billion—or 31.3 percent.

What’s the answer for you, your family, and your business – better and more proactive tax planning!  Finally learn how to keep more of the money your business earns!  Call us for help or with your questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

Tax Deferral and Income Deferral Strategies

Tax Deferral and Income Deferral Strategies

Tax Deferral – Increase Your Cash Flow

Big corporations understand and practice the following concept.  Does YOUR business?  Use strategic Tax Planning to minimize all current taxes including income, payroll, excise, and sales taxes.  Next, legally defer or delay as much tax as possible. Why pay $10,000 in taxes now if it can be deferred to later years?  Why not use that additional cash flow to create substantially more business income?  Finally, pay the taxes that can’t be reduced or deferred. This will ensure you are paying the minimum amount of tax each year and giving your business the cash flow it needs to survive.  Strategic tax planning sounds simple when you understand it.  Most importantly, with the right professional help, it is very achievable.  If you don’t believe deferred taxes are great for business cash flow and personal wealth building please read this.

http://www.businesswealthpreservation.com/einstein-tax-planning.html

Income Deferral – The Time Value of Money

Comprehensive tax planning should include a plan for the methods of accounting and the timing of expenses and revenues.  Planning may permit a business to delay income recognition and accelerate expenses and deductions.  Tax is a cash outlay.  By reducing income subject to tax in a tax year and increasing deductions in a tax year, you reduce the cash outlay for taxes that year.

Depreciation – Knowledge and Planning creates Cash Flow

Have you purchased, built, or modified a building, office, warehouse, or manufacturing facility?  A review of the depreciation method that you are using could significantly reduce your taxes this year and create substantial cash flow.  Read the Cost Segregation Section of our Blog for a detailed explanation.

http://businesswealthpreservation.com/blog and select Cost Segregation

Finally learn how to keep more of the money your business earns!  Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

Critical Areas of planning for Medical Practices and Physicians include:

1.  Asset Protection – Studies suggest that one out of every four physicians will be sued this year and six out of ten have been sued at least once in their careers.  While statistics can be manipulated and misleading, the statistics clearly indicate in our litigious society, physicians get sued a lot.  Contingency fee arrangements with law firms, coupled with runaway jury awards, mean no risk and great reward for a patient to go after a lottery type award.  Physicians are always deemed to have deep pockets, and litigation against them is very attractive.

As with all asset protection, or litigation liability limitation planning, physicians need to proactively protect the family home, personal savings, investments, real estate, rental property, vacation homes, life insurance, retirement plans, personal property, and future inheritances.  However, unlike other business owners, physicians need asset protection planning for the accounts receivables of the medical practice. The leveraging of the practice’s receivables can provide opportunities for planning in the areas of asset protection, retirement planning, and Estate planning.

The goal of an effective asset protection plan should be to render the physician and the practice “unattractive” to litigation because no assets are at risk to satisfy a litigation award.  An asset protection plan MUST be in place and practiced before the event that is the cause of action of the litigation clam.

2.  Choice of Entity and the Optimal Multiple Entity Structure – The utilization of the optimal combination of S-Corporations, C-Corporations, LLCs, and other entities can create the best personalized structure for full utilization of tax planning and minimization, payroll tax planning, compensation options, fringe benefit planning, retirement planning, and tax and income deferral opportunities.  Strategies and plans vary based on practice size and practice areas, personal and business assets, existing practice agreements and outside contractual relationships, and other specific facts and circumstances of the practice and its physicians.

3.  Advanced Tax and Business Planning – Specific consideration needs to be given to the individual costs to the practice of individual physicians.  How should asset protection planning or the utilization of a captive insurance company impact the ever increasing cost of insurance and malpractice insurance.  Advanced retirement plans and how the legal structure of the practice and its doctors can open up tremendous opportunities in the area of qualified and nonqualified retirement planning and funding.  Taking advantage of these plans can have a tremendous impact on the wealth building capacity of each individual doctor and take the place of a portion of the taxes paid in Congress’ attempt to redistribute wealth.

401(k) Early Withdrawals

We are receiving a lot of question regarding withdrawals from a 401(k) account.  Unfortunately, most of the questions seeking our advice come after an action has already been taken.  We can’t emphasize this enough – Tax planning must be proactive – ask before not after.

401(k) Early Withdrawals

First, a withdrawal from your 401(k) account is subject to income tax.  The money was deposited pre-tax and grows on a tax deferred basis.  Meaning you pay tax later, when you withdraw the money.  The benefit is the growth on $100 pretax dollars, than $60 after tax dollars. (Please refer to the Einstein example on our website.) And generally 60 year olds are in a lower tax bracket than when they were working.  Obviously this thinking is Pre-Obama.  So pretax deposits will always be subject to tax on withdrawals regardless of your age.

The 10% Penalty

The issue is the 10% withdrawal penalties.  Usually, any withdraw, before age 59 1/2, is subject to the 10% penalty unless you meet one of the hardship exceptions such as:

- Separation from employment after age 55

- Medical expenses that exceed 7.5% of adjusted gross income

- To prevent eviction or foreclosure

- To pay for college

- Court ordered divorce settlement

Taking a 401(k) Loan

You can avoid the penalty and tax by taking a loan from your 401(k) account.  Most plans permit a loan of up to 50% of the vested amount in your plan.  The drawback with the loan is the lost value of the 401(k) account and the fact you repay the loan with after tax dollars.  Your loan payments include a repayment of “lost” interest back into your account.

401(k) Withdrawals to Start a Business

We have gotten many questions regarding a 401(k) withdrawal to start a business and its qualification as a hardship withdrawal.  The IRS does not permit this transaction free from tax and penalty.  Many articles discuss the fact that it is “worth the risk” or “investing in yourself.”  If your business venture is successful and your sources of capital are limited, the 401(k) withdrawal income tax and penalty may be well worth it.

FYI – A strategy does exist  that involves a complex transaction for someone starting a business and using a 401(k) rollover into a newly established 401(k) plan and having the plan “invest” in the new business to cover wages and operating expenses.  This transaction is complex and will be scrutinized by the IRS so a knowledgeable ERISA attorney is a must.  If drafted correctly, the strategy does work.

Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

Accumulated Earnings Tax – C Corporations

Accumulated Earnings Tax – C Corporations

The C-Corporation, as an entity, is subject to corporate level tax on its net income or profits.  Once taxed at the corporate level, the remaining “after tax” profits can be distributed as dividends, paid as bonuses, or retained by the company.  Excess profits re-invested back into the company are referred to as retained earnings.  Generally, a reasonable amount of retained earnings, or retained earnings specifically ear marked for future company expansion or major equipment purposes are not scrutinized by the IRS.  If the IRS deems accumulated earning to be excessive as compared to the reasonable needs of the company, the IRS can take the position the dollars represent unpaid dividends.  The accumulated earnings tax of 39.6% (individual rate) will apply in addition to the regular corporate tax. Remember unlike a salary or bonus, a dividend is not deductible by the company.  But be cautious, before you get the idea of clearing the retained earnings account by paying large salaries or bonuses to the owner(s) read the excessive compensation article elsewhere in our Blog.

What’s the answer – better and proactive tax planning!

Finally learn how to keep more of the money your business earns!  Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

Retained Earnings – S Corporations

Retained Earnings – S Corporations

Although an S-Corporation does not have the excessive earnings tax issues that a C-Corporation, we do see many businesses, taxed as S-Corporations, that have large retained earnings.   Do you know why the IRS doesn’t have a problem when an S-Corporation has large dollars, or strike that, large numbers in the retained earnings account?  It’s simple.  You, the business owner, have already paid all the taxes due.   The S-Corporation has no corporate level tax, and you have already paid the individual income taxes on the one time business profit.

If you don’t remember, it went like this.  In 2007, your S-Corporation business had taxable net profits of $100,000, that number was reflected on your personal return, and you paid taxes on it.  But, because of cash flow issues, you only paid yourself $60,000.  The other $40,000 was reflected as retained earnings.  The concept of paying tax on $100,000 even though you only received $60,000, is clearly one of the negatives of being taxed as an S-Corporation.  As a side note, this situation can be avoided with better tax planning.

If the above situation sounds familiar, you might be staring at a financial statement that indicates you have hundreds of thousands of dollars in retained earnings.  The positive side is you have hundreds of thousands of after-tax dollars that is yours for the taking – tax free.  The cruel reality is you don’t have the “actual” cash to take it out.  Try putting $100,000 of retained earnings in your personal bank account without the check to go with it.

The good news, with better tax planning, in addition to better business revenue and profitability, you can develop a plan to get these tax free dollars out of the business over time.  The plan must include the payment of a reasonable salary amount in addition to the tax free distributions.

What’s the answer – better and proactive tax planning!

Finally learn how to keep more of the money your business earns!  Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

Excessive Business Owner Compensation – C Corporation

Excessive Business Owner Compensation – C Corporation

The IRS permits a business to deduct as a business expense, a “reasonable” salary, as compensation for services performed by employees and business owners.  For obvious reasons, the owner’s salary if deemed to be excessive in relationship to services performed, industry standards, and geographical location, could potentially be reclassified by the IRS as a partial dividend.  One of the significant differences of how a C Corporation is taxed, is the potential for double taxation.  Corporate profits are taxed once at the corporate level, and taxed again when they are paid to the owner(s).  Hence the double tax concept.

In an ill-advised attempt to avoid this double taxation, business owners and their advisors pay all “excess” money out to the owners as salaries.  Salaries paid to owners are 100% deductible by the company as an ordinary and necessary business expense.  Dividends on the other hand are not deductible by the company.  Hence the desire to pay salary in lieu of  dividends.  This however, is exactly why this issue is attractive to the IRS.  The portion of the salaries deemed to be excessive would be reclassified as a dividend.  As a dividend, the expenditure is not deductible, so the company would have additional income, resulting in additional taxes, penalties, and interest.  The payroll tax previously paid by the company would be forfeited.  The penalties generally are equal to the tax due.  Obviously, not a good situation for the company and a very expensive lesson.

So how can this be avoided?  Strategic, and proactive tax planning, entity structuring, and choice of entity planning can avoid these problems by creating other acceptable and tax friendly owner compensation options.

Finally learn how to keep more of the money your business earns!  Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

Employee vs. Independent Contractor – Tips for Business Owners

Employee vs. Independent Contractor – Tips for Business Owners

If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

IRS Guidelines

Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.

1. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.

2. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.

3. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

It is critical that you, the business owner, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

Think of it like this:

To be classified as an independent contractor:

1. Business owner can specify “what” is to be done not “how”  (Control Test)
2. Does the person in question have their own tools, business cards, and invoices?
3. Best Answer – Have the independent contractor set up an LLC.

Advantages of having the independent contractor set up a separate LLC

- Separate legal entity

- Contractor can now benefit from business tax planning

- Contractor can set up compensation, fringe benefit, and retirement planning

- Significantly reduces audit risk for both parties

Estate Planning – An Overview

Estate Planning – An Overview

Procrastination. Wikipedia defines procrastination as the deferment or avoidance of an action or task to a later time.   If you procrastinate on cleaning out the garage the result is a cluttered garage.  Procrastinate on reviewing and updating your tax planning and you are costing yourself money.  A painful reminder comes every time you write that check to the IRS.   If those quarterly checks don’t motivate you what will.

What about the proposition of splitting up to half of your accumulated wealth with the government, jeopardizing the future viability of the family business, and causing your loved ones financial and emotional drain into the next generation.  Do you want that to be your legacy?  This is exactly what could lie ahead if you procrastinate in completing and updating your estate planning.  And oh yes, estate planning provides no quarterly or annual reminders.  I dread the phone calls from the son or daughter as they are coming to grips with the fact that not only are they suffering a devastating loss but someone is telling them a large check needs to be written to the IRS in a few short months.  Will you have the liquidity to pay a large estate bill?   And if you do, why give it to the IRS?  Proper estate planning should eliminate your estate tax.

So where do you start.  Stop making excuses.  Excuses are many and varied, but don’t use them to justify your procrastination.  The estate tax isn’t going away, it’s not a tax reserved for the very wealthy, and yes, your estate may in fact be large enough to worry.

Do I really need to worry about estate taxes?

A common misconception among business owners is that there is no need to worry about estate taxes because their net worth will fall below the need-to-worry threshold.  Boy are they shocked when their estate tax is calculated.  What did you miss?  A reliable value for the business, insurance death benefits, and a simple will that results in the first spouse to die losing their million dollar or more exemption are just a few examples.  Your will is not an estate plan.  A simple will does nothing to minimize your estate taxes.  An estate plan utilizes trusts and other vehicles to move assets during your life so that they are not included in your estate tax calculation.

What’s included in my estate tax calculation?

Are you ready for some math?  Add your non-business assets and subtract liabilities.  Add the face value of life insurance policies that you own and the value for your business.  (note: It is imperative that any planning or legal document utilizes a number from an unrelated, licensed valuation professional.  If it is not the IRS will likely challenge the value.)  This should provide you with a “ballpark” number to think about the level of estate tax planning you need.

Assets (add 1 through 5))

1. Cash and Equivalents (include cash, checking and savings accounts, CDs, and money market funds)
2. Investments and Retirement Accounts (include vested pension plans and profit sharing accounts, 401(k), IRA, stocks, mutual funds, bonds, antiques and collectibles.)
3. Real Estate (market value of home, vacation home, rental property, and land)
4. Vehicles (automobiles, boat, and recreational vehicles)
5. Personal Property (personal and household assets, furs, and jewelry)

Liabilities (add 1 through 5 and subtract total liabilities from total assets)

1. Mortgages
2. Vehicle Loans
3. Home Equity and other Credit Lines
4. Credit Card Debt
5. Other Liabilities

Net Worth = (Assets – Liabilities)

Life Insurance – Face Value of Policy(s) you own (add)

Estimated Value of Business (add)

Total – Estate Net Worth = (Net Worth + Life Insurance + Business Value)

If your total estimated estate exceeds $1 millions dollars make arrangements to meet with an attorney who specializes in estate planning.

What can you do?

1.  Don’t let a simple will be the extent of your estate plan.  Utilize trust planning for assets and insurance to ensure that you and your spouse are taking full advantage of the current maximum exemption.

2.  Your estate plan must include a living will that includes all necessary medical directives and the appointment of a health care power of attorney.

3.  Take advantage of annual gifting. You can gift $13,000 annually ($26,000 for husband and wife joint gifts.)  State sponsored programs also permit funding for children and grandchildren’s future college planning.

Is it time to revisit your estate plan?

With the estate tax’s exclusion amount likely to return $1 million in 2011 and beyond – complacency might not only be costly but might also produce a division of your estate in ways that you did not intend or desire.  There is no question that this is a complex, confusing and seemingly ever-changing area of the law.  If knowledge is power, knowledge combined with proper and timely planning is king.

Does it really matter if there is no estate tax in 2010?  If you die in 2010 your entire estate could pass to your heirs with no estate tax.  Planning note – You should review the medical directive in your estate plan if it contains language about deciding when to pull the plug on life sustaining measures.  Hopefully no decisions concerning when to end a life are based on estate tax ramifications but stranger things have happened.   For those planning on still being included in the census as of January 1, 2010, you better have your estate planning up to date.

When do I need to update my estate planning?

Once you have a comprehensive estate plan in place, it should be reviewed annually and anytime your family experiences a death, birth or significant change net worth.

Unfortunately, you will never know exactly when you need it until it’s too late.  Make sure your estate plan is complete and up to date.  Don’t leave confusion, family disharmony, and a fire sale of your assets as your legacy.

Saving for College – 529 Plans

Saving for College – 529 Plans

Many major purchases and investments are made during your lifetime; however, is there any investment more important than the one in your child’s future? With the ever increasing cost of higher education and the possibility of multiple children and multiple degrees –or the six year plan for the four year degree –the need for planning has never been so important. Therefore, why not set up a plan while the future student is still a toddler? A plan parents, grandparents and other relatives can contribute to during the life of that student. Better yet, what if the contributions could be made without gift tax consequences and could grow tax free? Well, the good news is they can! Here is how…

In 1996, Congress created Section 529 plans. Named after the IRS code they were based upon, Section 529 plans permit the following:

-         Flexibility when choosing a school

-         Transferable savings from the state in which the plan was established to academic institutions in other states and countries

-         The opportunity for late starters to make large “catch up” contributions

-         Tax breaks on contributions, growth and withdrawals

The following are several frequently asked questions regarding Section 529 plans.

Who is eligible?

Everyone is eligible as there are no income or age restrictions.

Do I have to choose a college when I establish the plan?

No. Unlike prepaid tuition plans that allow you to pay for a college education at today’s tuition rate, 529 plans offer the flexibility of allowing the student to choose the school.  The school does not need to be located in the state in which the plan is established.  Students can also pursue opportunities which allow them to study in foreign countries.

Will savings in a 529 plan impact future financial aid?

Assets accumulated in a 529 plan are considered the property of the individual who opened the account. A financial aid office will typically focus initially on the student’s assets. Colleges require the student to contribute a greater percentage of his or her assets towards the tuition bill, so a 529 plan would have less of an impact on financial aid.

How much can I contribute?

To avoid gift tax consequences, and the requirement to file a gift tax return, annual contributions should be limited to annual gift tax limits. Currently, an individual can gift $12,000 ($24,000 when made jointly with a spouse) to each future student in any year without triggering federal gift tax consequences. The “catch up” feature for late starters allows for an accelerated five-year gift of $60,000 to be contributed all at once (per beneficiary) without triggering gift tax. Total plan contributions vary by state, but most permit each potential student to accumulate in excess of $200,000.

Can I contribute stocks, bonds or mutual funds directly to a 529 plan?

No, unfortunately only cash contributions are permitted. Other assets must be converted to cash before they are contributed.

How is the money later withdrawn?

When the child reaches college age, monies can be withdrawn for payment of qualified college expenses including tuition, fees, books, room and board and certain other eligible expenses. Withdrawals from qualified plans are tax free. Any monies remaining in the plan can be used by another designated beneficiary such as a sibling, first cousin or other defined relative. Money withdrawn for purposes unrelated to education is subject to a 10 percent penalty and ordinary income tax treatment.

Does the account become the property of the child when he or she reaches college age?

No. The 529 plan is not a custodial account the student gains control of when reaching the age of 18 or 21 (depending on the state). The account owner decides when and how the funds will be used. If the funds are not used by the intended beneficiary, the account owner can deicide who can use them based on the plan’s rules.

Can I determine how monies will be invested?

Not directly, but each state plan utilizes an asset management group; so, after comparing various state plans, you can decide which group is best to manage your plan. You do not need to reside in the state you choose; however, before deciding on a particular out-of-state plan, check with your tax professional to ensure you are not missing out on a state tax benefit. While plans vary by state, your investment will generally be divided into a specific asset allocation based on the child’s age. Though investment risk is reduced as the child nears college age, the investment returns are not guaranteed. To check specific state plans for asset management and contribution limits visit www.savingforcollege.com.

Are the savings in the 529 plan subject to fees and expenses?

Yes, you can expect to pay enrollment, annual maintenance and/or fund expense fees. Compare the fees charged by the particular state before investing, as they can vary greatly.

What are the specific tax advantages of a 529 plan?

Although contributions are not federally tax deductible, some states do allow a full or partial deduction. The benefit of a 529 plan is that contributions within the gift tax limits discussed previously are not considered the child’s income and have no gift tax ramifications to the contributor. The funds’ earnings grow tax free, and distributions for eligible expenses are tax free. The Pension Protection Act of 2006 has permanently extended benefits that were scheduled to expire in 2010.

In conclusion, do your research and consult with your trusted tax professional regarding 529 plans and other plans available to you.

The Pros and Cons of 529 Plans

Pros

1. Flexibility when choosing a school
2. Easy to set up
3. Favorable tax treatment
4. Plan manages investments for you
5. Multiple individuals can contribute to the plan
6. High contribution limits
7. Plans are transferable
8. Limited impact on financial aid

Cons

1. Limited investment options
2. Plan subject to management fees and expenses
3. Penalties for non-educational uses

Put more money into your pocket!  Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com