Coronavirus and your taxes:  Here are what you need to know

With hundreds of billions of dollars in stimulus money, business loans, and unemployment benefits floating around, everyone is trying to keep up with what all this means for you when you sit down to file your taxes this year.

First, don’t panic! Here are some answers to some of the biggest questions about how the coronavirus (and everything that followed because of it) might affect your 2020 tax returns, plus some action steps you can take to prepare yourself and avoid any nasty “Tax Day” surprises.

1. Will the stimulus check money I received be taxed?

Nope, the stimulus money that you received from Uncle Sam will not count as taxable income. So that’s one less thing you have to worry about when Tax Day rolls around!

Let’s back up a little bit. In March, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in an effort to try and provide help to everyday Americans during the height of the coronavirus pandemic.

Individuals who filed taxes in 2018 or 2019 received $1,200 for each adult and $500 for each child. So, a household with two adults and two children, for example, most likely received $3,400 in stimulus money.

So, why isn’t that money being counted as taxable income? Because it’s being treated like a refundable tax credit for 2020. Translation: Your stimulus check is sort of like an advance on money you would have received anyway as part of your tax refund in 2021.

What is a Tax Credit?

In the tax world, finding out if you qualify for a tax credit can feel a lot like finding that unexpected $20 bill—only much more valuable! Tax credits can magically shave hundreds, or even thousands, of dollars off your tax bill. Now that is worth busting a move or two!

Let’s take a closer look at what a tax credit is, how they work, and which ones you might be able to claim on your tax return this spring.

What Is a Tax Credit?

A tax credit reduces how much you pay in taxes by letting you subtract a certain amount of money directly from your tax bill. A $500 tax credit, for example, will save you $500 in taxes owed. The more tax credits you claim, the more money you get to keep in your pocket!

What’s the point of having tax credits? The government sometimes uses taxes to try to discourage folks from certain behaviors or activities (think taxes on cigarettes). But Uncle Sam will also dangle a tax credit like a carrot on a string to encourage certain behaviors and activities that might be beneficial for the economy, the environment or some other cause.

Tax credits are also a way to provide a tax break for low- and middle-income taxpayers who need it most.

What’s the Difference Between a Tax Deduction and a Tax Credit?

While tax deductions and tax credits both lower how much you’ll pay in taxes, they do so in different ways. Deductions lower your taxable income while tax credits lower how much you actually owe in taxes dollar for dollar.

How does all that work? Well, if you’re in the 22% tax bracket, a $1,000 tax deduction will cut $220 off your tax bill. That’s pretty good! But a $1,000 tax credit will actually save you $1,000 in taxes for the year. So, between deductions and credits, it’s pretty clear to see that tax credits are the more valuable of the two!  

What Is a Tax Deduction?

There are two words every taxpayer needs to get familiar with as Tax Day draws near. These two words will help you shave hundreds, maybe even thousands, of dollars off your tax bill.

Are you ready? Here they are: tax deductions.

You’ve probably heard phrases like “you can write that off your taxes” or “those are deductible expenses” and wondered if you really understand how this whole tax deduction thing works. You’re not the only one!

A lot of folks don’t know which tax deductions are available or how to claim them on their tax returns. But you don’t want to be that guy or gal, because it could mean you’re leaving a good chunk of money in the hands of the IRS without even knowing it!

What Is a Tax Deduction?

Simply put, tax deductions reduce how much you pay in taxes by lowering your taxable income. When you hear the word deduction, just think subtraction. You’re simply subtracting how much of your income is taxed and reducing how much you owe to Uncle Sam in the process. Cha-ching!

For example, charitable donations are one of the most common tax deductions available. That means you could “write off” the money you gave to charity last year and reduce your taxable income by the amount you gave. 

So, if your income is $50,000 and you gave a $1,000 gift to your favorite charity last year, you could claim that gift as a tax deduction and you’ll only be taxed on $49,000 instead of $50,000. 

But that’s only scratching the surface! From retirement plan contributions to home mortgage interest, there are dozens of tax deductions out there you might be able to take advantage of. 

What’s the Difference Between a Tax Deduction and a Tax Credit?

While tax deductions lower your taxable income, tax credits cut your taxes dollar for dollar. So, a $1,000 tax credit cuts your final tax bill by exactly $1,000. A tax deduction isn’t as simple. If you get a $1,000 tax deduction and you’re in the 22% tax bracket, that deduction reduces your taxable income and saves you $220 when it’s all said and done.  

Tax credits fall into two main categories: refundable and nonrefundable. If you have a refundable tax credit of $500 but only owe $200 in taxes, the IRS will send you a check for $300. On the other hand, if you have a nonrefundable tax credit worth $750 but you only owe $250 in taxes, you unfortunately won’t get a check for $500 (the balance of the credit you didn’t use).

How Do Tax Deductions Work?

When you’re filling out your tax return, there are two ways to claim tax deductions: Take the standard deduction or itemize your deductions. You have to pick one! 

The standard deduction is the easy option—it’s like an automatic tax freebie. If you choose to take the standard deduction, your taxable income is automatically reduced by a set amount based on how you file (like single, married, or married filing jointly). That lowers the amount of taxes you have to pay. No need to dig through receipts or bank statements! 

Itemizing your deductions takes more work—you’ll need to list all the deductions you want to claim one by one. And you’ll have to fill out a Schedule A form with your tax return and go through your records to back up your claims. 

Yes, itemizing is a bit of a hassle, but it’s worth the effort if you can claim enough deductions to lower your taxable income more than the standard deduction.

How do you know which option is best for you? There are a few things you need to know before you make your decision this year.  

What Is the Standard Deduction for the 2019 Tax Year?    

Thanks to the 2018 tax reform law, the standard deduction almost doubled from what it used to be. That’s great news for many taxpayers! For the 2020 tax year, the standard deduction was adjusted slightly for inflation. So, if you’re single, the standard deduction is now $12,400. Married and filing together? Your standard deduction is $24,800. 

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Important to note: If you or your spouse are over 65 or legally blind, you might be able to get a larger standard deduction. But if you’re married filing separately, you’re a nonresident alien or a dual-status alien, or someone else claims you as a dependent on their return, your standard deduction may be lower. Be sure and check with a tax pro if you have any questions.

What Expenses are Tax Deductible?

First, let’s take a look at what you can write off from your taxes. Here are some of the most common deductions that many taxpayers can take advantage of:

Charitable Donations

The more you give, the more you can deduct from your taxes! Any amount you gave to your church, your alma mater, or your favorite charities can all be written off your taxes. Most years, you can deduct any amount of charitable giving up to 60% of your taxable income. But thanks to the CARES Act, you can deduct all of your charitable contributions in 2020. Nice!

But even if you don’t itemize your deductions, the CARES Act also allows you to take an “above-the-line” deduction (which lowers how much of your income is taxable) of up to $300 for charitable giving.

Medical Expenses

Do you have health insurance but still find yourself paying out of pocket for medical or dental expenses? The IRS lets you deduct medical expenses that are more than 7.5% of your taxable income for things like appointments with medical professionals or dentists, prescription drugs, contacts or eyeglasses, and health insurance premiums (paid for with after-tax dollars and not reimbursed by your employer), just to name a few!

To break it down: If your adjusted gross income is $50,000, then 7.5% of that is $3,750. So, if you have $5,000 of medical expenses that weren’t covered by your health insurance, subtract the $3,750 from that and you get $1,250 as a tax deduction.

State and Local Taxes

A lot of folks forget this one! The IRS lets you choose to deduct either your state and local sales tax or income tax, along with some foreign taxes. If you live in a state with no income tax or you made some big purchases like a new car or a furniture set for the living room, the sales tax deduction is the way to go. And if you’re a homeowner, you can also deduct property taxes from your tax bill. 

The new tax law caps the total amount you can deduct in income, sales and property taxes to $10,000.

Student Loan Interest

If you’ve been paying so much in student loans that Sallie Mae seems like that smelly college roommate who just wouldn’t go away, take some comfort in the fact that you can claim a student loan interest deduction of up to $2,500.

Mortgage Interest

Ah, the joys of homeownership! There’s the big backyard, the white picket fence, your mortgage payments . . . okay, maybe not that last part. But at least you can deduct that interest you paid on up to $750,000 of mortgage debt.

Retirement and Investing

If you happen to have a traditional IRA, those contributions are most likely tax-deductible. But your deduction might be limited based on your income and whether or not you (or your spouse if you’re married) have a retirement plan through your workplace.

But here’s the catch: You’ll have to pay taxes on the money you take out of your traditional IRA in retirement. Yuck. That’s why we recommend investing with a Roth IRA instead. Of course, you won’t be able to deduct Roth contributions off your taxes now. But who cares? You’ll be too busy enjoying tax-free growth and withdrawals in retirement later. Future you will thank you!

Contributions to your traditional pre-tax 401(k) also lower the amount of your taxable income, potentially moving you into a lower tax bracket and saving you money on taxes this year. But you’ll also have to pay taxes when you take that money out during retirement. So, keep that in mind

Home Office Deduction

If you’ve turned part of your home into your own workspace used only for business, you can write off work-related expenses like rent, utilities and maintenance costs.

Itemizing vs. The Standard Deduction: Which Should I Choose?

Here’s the deal: With the increase in the standard deduction, taking that automatic deduction will make sense for more taxpayers than before. But it’s still important to add up your itemized deductions before you make that decision.

Take Linda and Eric, for example. They’re married and filing jointly, so they automatically qualify for that $24,800 standard deduction—and they’re excited about that huge amount! 

But just to be sure, they go through their records to find all the tax deductions they can claim if they choose to itemize. Would they save money that way? 

After adding up their itemized deductions, they see they can knock more than $28,000 off their taxable income, potentially saving them hundreds of dollars on their taxes. 

Do you think Linda and Eric regret going back through all their receipts, files and bank statements? Not a chance!  

Still, for many other taxpayers, the new standard deduction is far and away the better option. 

Meet Shawn. He’s a single guy just starting out in his career. He’s putting in crazy hours at his accounting job and renting a small apartment while he tries to work through his debt snowball. Since he doesn’t have that many expenses to deduct, the standard deduction offers a much larger tax break than itemizing would. That’s a no-brainer!

Itemize or Take Standard Deduction? 

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When it comes to taxes, everyone’s situation is different. There is no one-size-fits-all solution! If you’re a homeowner or business owner, you made a lot of charitable contributions, or you paid out of pocket for hefty medical expenses, then itemizing might be the best move for you.

Maximize Your Refund with an Expert Tax Consultant

The bottom line? You want to be sure you’re getting the most out of all these tax deductions. Just one missed deduction could cost you far more than the fee of a professional.

That’s why when you’re in doubt, you should turn to a tax advisor. With years of experience behind them, their wealth of knowledge can take the guesswork out of taxes—protecting you and your wallet.

The sooner you connect with a pro, the sooner you can check taxes off your to-do list.

2. I took money out of my 401(k). What’s going to happen with the money I took out?

Another thing the CARES Act did is allow people to take a type of “hardship withdrawal” of up to $100,000 out of their retirement accounts until the end of 2020 without having to pay the usual 10% early withdrawal penalty.

But even without the early withdrawal penalty, you’ll still have to pay income taxes on any money you take out of your traditional 401(k)s and IRAs. If you’re not careful, you could bump yourself into a higher tax bracket and owe Uncle Sam even more in taxes for this year.

Look, if you’re currently staring at your 401(k) balance with hungry eyes, let us dump a bucket of ice-cold water on that idea: Don’t do it. We don’t want you to even think about taking money out of your retirement accounts. The only time it ever makes sense to tap into those accounts is to avoid bankruptcy and foreclosure. That’s it.

Even without the early withdrawal penalty, raiding your 401(k)s and IRAs is a bad idea for two reasons. First, you’re sabotaging your money’s ability to grow over the long term and basically stealing money from your future self. Not cool. And second, like we just talked about, you’ll have to pay taxes on the money you take out.

But to the point, what if you already took some money out of your 401(k)s and traditional IRAs? The good news is you can undo that mistake! The CARES Act allows you to return any funds within the next three years and file an amended return. That way, you can get a refund on the taxes you paid on that money and get your retirement savings back on track.

3. I lost my job and received unemployment benefits. Are those benefits taxable?

Yes, any unemployment benefits you received in 2020 will count as taxable income.

Millions of Americans lost their jobs or were furloughed in the midst of the lockdowns and economic shutdowns, leading to record numbers of people signing up for unemployment benefits.⁴ The CARES Act also allowed the freelancers, independent contractors and the self-employed to file for Pandemic Unemployment Assistance, a program designed to help folks not usually eligible for unemployment benefits.

There are two ways you can pay your taxes on those unemployment benefits, depending on what you chose when you filed. The first is to have 10% of each payment withheld to cover all or some of what you owe in federal income taxes (you can’t withhold more or less from unemployment benefits). That’s probably the easiest option! If you chose not to have taxes withheld from your benefits, then you’ll have to pay quarterly estimated taxes on that money.

4. I took on some side jobs to make up for some lost income. What should I expect?

Whether you were delivering groceries all over town or selling everything in your house that wasn’t nailed down to the floor, you might have taken on a side gig (or three) to replace lost income or pile up cash to ride out the pandemic. Hey, you got to do what you gotta do!  

But guess what? That money you made freelancing or doing odd jobs here and there will be taxed, so here’s a rundown of what you need to know:

·         First, you’ll owe regular income taxes on that money at your ordinary tax rate.

·         On top of that, you’ll also have to pay the self-employment tax—that’s a 15.3% tax which covers your share of Social Security and Medicare taxes—if you made more than $400 in self-employment income for the year. Don’t worry, you can probably write off half of that 15.3% on your tax return.

·         If you expect to owe more than $1,000 in taxes for the year, the IRS wants you to pay quarterly estimated taxes, so it doesn’t all pile up toward the end of the year.

·         You’ll probably receive 1099 forms from those you did work for, so keep an eye out for those. And you’ll need to fill out a Schedule SE form to report any other self-employment income you might have made during 2020.

Here’s a good rule of thumb for the future: Since the taxes from your side hustle income usually won’t be withheld like they would be in a “normal” job, you should set aside 25–30% of every paycheck you get for taxes. That way, you’re not scrambling around to pay your taxes when the deadlines roll around.

5. I’m working remotely for my company from a different state. How will that impact my taxes?

This one’s a little tricky. According to the Pew Research Center, about 1 out of 5 Americans relocated because of the pandemic or know someone who did. If you’re one of those remote workers who crossed state lines, you might be in for a tax surprise—and not the good kind.

You see, each state has its own tax system with its own set of rules—and most states that have their own income tax will impose them on anyone doing work in their state, even if they are just passing through.

Now, a few states already have “reciprocity agreements” in place that prevent income from being taxed twice, and a few others have offered tax relief for remote workers because of the pandemic. But some states are not budging on their state tax laws. That means a lot of folks who work in one state but live in another could end up owing taxes in two states this year. 

Check your state’s tax laws and get in touch with a tax professional who will be able to help you figure out which state governments you might be getting a tax bill from.

6. Since I was working from home, I can claim the home office deduction on my tax return, right?

Not so fast! Remember the Tax Cuts and Jobs Act that was passed a few years back? That law did away with a bunch of “miscellaneous itemized deductions” in exchange for a higher standard deduction. That means writing off the cost of setting up and maintaining a home office is off the table for most taxpayers.

Generally, the home office tax deduction is only available for self-employed individuals, freelancers or independent contractors who have a home office that is used exclusively for business purposes on a regular basis. That means office workers sent home by their employers during the pandemic don’t count, since they don’t work exclusively out of their home.

But that doesn’t mean you’re out of options! If you’ve had to spend some money on supplies that you needed to do your job from home, ask your employer if they’d be willing to reimburse you for those expenses.

7. I’m a college student and took out some funds from a 529 plan to pay for college. Then we were sent home and the university refunded some of it. What happens to that money?

Many colleges and universities across the country decided to shift all their classes online and send students home for the year. As a result, many students (or their parents) got a refund for what they paid for tuition and student housing. But if you used a 529 plan or Educational Savings Account (ESA) to pay for those educational costs, you might find yourself in some tax trouble.

Here’s why: Any money you take out of a 529 plan or ESA must be used for qualified educational expenses in order to be tax-free. Makes sense. But since that money isn’t being used to cover education expenses anymore, now you’ll have to pay income taxes on it and the IRS might smack you with a 10% penalty. Uh-oh.

To avoid paying those taxes and penalties, you need to put that money back into your 529 or ESA account. But don’t wait too long, because you only have 60 days from the date the refund was issued to do that. Clock’s ticking!  

What is a 529 Plan?

A 529 plan (named after its section of the IRS code) is an investment account offering tax breaks that allows you to set aside money for qualified educational expenses—think things like tuition, fees, books, and room and board. Let’s dive into the details!

How Does a 529 Plan Work?

Most 529 plans are run by states, and there is one prepaid plan (more on that in a minute) run by a bunch of private colleges. Each 529 plan account has an account owner (often, though not always, a parent) and the beneficiary (the student). The owner controls the investments and chooses the beneficiary, which could be themselves. Anyone can contribute to a 529, and there are no income or age limits on contributions. And while most people associate these plans with saving money for their kids’ college education, as of 2020, you can now use the money in some 529 plans for K-12 public, private, religious school tuition, and apprenticeship programs.

While you have to pay a “gift tax” if you contribute more than $15,000 ($30,000 for a couple giving together) in one year, you can get around that by doing what’s called five-year gift tax averaging. What this means is that over a five-year period, you can give in unequal amounts up to $75,000 ($150,000 for a couple). Let’s say you give Junior $20,000 in years 1–3 for a total of $60,000. In years four and five, if you only contribute $7,500 per year, you’ll be at that $75,000 limit over the five years and qualify for the gift tax averaging, and the IRS doesn’t get a cut!

Like some retirement accounts, you make contributions to a 529 with after-tax dollars, and the earnings are tax-deferred. That means qualified distributions (aka the money a beneficiary takes out) for a 529 are completely tax-free.

Types of 529 Plans

Now there are two basic types of 529 plans you’ll want to know about: prepaid plans and savings plans. There are some pretty important differences between these two, so be sure to focus here.

Prepaid Plans                                                                     

A 529 prepaid plan locks in tuition at current rates, so you can prepay future college costs. Today, there are 19 prepaid plans, but only 10 are accepting applicants. With the way tuition is rising this seems like a pretty good deal. Before you’re shouting, “Sign me up!” you might want to ask yourself why don’t all states offer them? Well, that’s what they call a red flag, people! You need to understand the increases in college costs can outpace the return on the prepaid plan. So, you may have to shell out more cash to cover the tuition costs. Some prepaid plans offer guarantees, but some states don’t honor the guarantee. Listen up, this could mean the money may not be there when your child is ready to use it!

Experts say to plan for an annual 8% average tuition hike, which means tuition costs would double every nine years, or double twice from birth to college age!³ That means if the tuition today is $50,000, it would be about $200,000 18 years from now.

Benefits of a Prepaid 529 Plan

·         You can buy units, or credits, at participating schools (usually public and in-state).

·         There are no annual contribution limits, but you could have to pay a federal “gift tax” if you contribute more than $15,000 in a year.

·         There are no age limits for contributions or using the money in the prepaid plan (in most states).

Drawbacks of a Prepaid 529 Plan

·         Tuition rate may not be guaranteed.

·         Can’t be used to pay for future room and board.

·         Doesn’t let you prepay for K-12 tuition.

·         Has residency requirements for the owner and/or beneficiary.

·         You can’t transfer the money to a child of the beneficiary (your grandchild) if your kid doesn’t end up going to college.

·         May charge an enrollment/application fee and ongoing administrative fees.

Bottom line: Steer clear of prepaid plan options.

Savings Plans

A 529 savings plan allows you to choose a predetermined investing portfolio that you can use to grow money for your child’s future educational expenses. You can reallocate the money within the portfolio you choose, but only twice a year.

The SECURE Act, passed in December 2019, created new qualified expenses for 529 savings plans. That means money in your plan can now be used for apprenticeships, homeschooling expenses, and repayment of up to $10,000 of student loans for the beneficiary and their siblings.⁴

With a 529 savings plan, you can shop around and see if 529s from other states have better investment options and lower fees. My best piece of shopping advice is to work with an investment pro who knows these plans better than anyone.

Benefits of a 529 Savings Plan

·         Each savings plan varies from state to state, and you don’t have to use your state’s plan.⁵ You can go with the most affordable plan!

·         There are no annual contribution limits, but you may have to pay a federal “gift tax” if you contribute more than $15,000 in a year.  

·         There’s no age limit for contributions or distributions. If your 30-something decides to go back to school, they can still use the money.

·         There are no income restrictions for contributions or distributions.

·         Growth and withdrawals are not subject to federal income tax if used for qualified educational expenses, including tuition and books.  

·         If you don’t use the money for one child, you can transfer the funds to another child or grandchild.

·         If you want to use money in a savings plan for noneducational expenses, you can. It’s your money! But nonqualified withdrawals are taxed and hit with a 10% penalty. Oh, and the person who receives the distribution pays the tax.⁶

Drawbacks of a 529 Savings Plan

·         You cannot lock in tuition costs.

·         May charge an enrollment/application fee, annual account maintenance fees, ongoing program management fees, and ongoing asset management fees. 

Is a 529 Worth It?

The tax-deferred growth and tax-free withdrawals for qualified expenses are attractive reasons to have a 529 plan. Another is the higher contribution rates that can reach up to $500,000, depending on the state.⁷ But obviously the two types of plans are not created equal here.

Investing in 529 savings plans with good growth mutual funds is the best way to go with a 529. Savings plans provide a better return by investing your money instead of locking in a tuition rate with the prepaid plan. Plus, with most prepaid tuition plans, the state will only refund the principal (not any interest you’ve earned) if your child decides not to go to college.

Now, in addition to 529s, when looking at college planning for Junior, you’ll also want to check out an Education Savings Account (ESA). When it comes to a 529 and an ESA, the strongest argument for an ESA is the virtually unlimited investment options.

Investing in 529 savings plans with good growth mutual funds is the best way to go with a 529. Savings plans provide a better return by investing your money instead of locking in a tuition rate with the prepaid plan.

What is an Educational Savings Account (ESA)?

How much student loan debt do you think the average college student racks up by the time they cross the graduation stage? $5,000–10,000? Think again. According to the Wall Street Journal, the average college graduate’s student loan debt is at a whopping $37,172. And that’s just the average!

The most recent data from the Federal Reserve Bank of New York shows the overall student loan debt in America hovering just over $1.3 trillion. Trillion!

At this rate, college graduates will be lucky to have their student loans paid off before their kids start college! As a parent, you’re probably thinking there has to be another way. Well, there is! You can start saving for college by opening a college fund. It’s not easy, but with focused dedication, hard work, and careful planning, it’s possible to save enough so your child can go through college debt-free!

When Should You Start Saving for College?

Saving for college is Baby Step 5, and we generally advise parents to start saving for college as soon as they can. But a lot of times it’s a bit more complicated than that.

Starting a college fund is a great goal, but it’s not the only goal. You likely have other financial priorities like paying off your mortgage, your credit card bill, or your own student loan debt.

You don’t want to neglect your own money goals, especially when it comes to retirement savings. There are other ways to pay for college, like through grants or scholarships. Bottom line, you need to take care of your future first.

Before you can start saving for your children’s college fund, it’s important you’ve already done the following:

• Paid off any debt (this includes things like your credit card debt, your own student loan debt, etc.)
• Set up an emergency fund of 3 to 6 months of expenses to cover any unexpected costs
• Put 15% of your income toward retirement savings through your employer-sponsored retirement plan, like a 401(k) and/or a Roth IRA

The Best Ways to Start a College Fund

First, you need to figure out how much you need to save for college. We recommend saving for your children’s college using the following three tax-favored plans:

Education Savings Account (ESA) or Education IRA

An ESA allows you to save $2,000 (after tax) per year, per child. Plus, it grows tax-free! If you start when your child is born and save $2,000 a year for 18 years, you would only invest $36,000. While the rate of growth will vary based on the investments in the account, you’ll likely earn a much higher rate of return with an ESA than you would in a regular savings account—and you won’t have to pay taxes when you withdraw the money to pay for education expenses.

Why We Like It:

• Variety of investment options
• Grows tax-free

Why We Don’t:

• You must be within the income limit to qualify
• Contributions are limited to $2,000 per year
• The amount must be used by the beneficiary by age 30

529 Plan

If you want to save more for your children’s college education, or if you don’t meet the income limits for an ESA, then a 529 Plan could be a better option. Look for a 529 Plan that allows you to choose the funds you invest in through the account. Some Financial Advisors warn against using a 529 Plan that would freeze your options or automatically change your investments based on the age of your child.

The right 529 Plan will also give you the option to change the beneficiary to another family member. So, if your firstborn decides not to go the college route, you can still use the funds you saved for the next kid in line.

Why We Like It:

• Higher contribution rates (varies by state, but generally you can contribute up to $300,000)
• Most of the time, there aren’t any income limits or restrictions based on age
• Grows tax-free

Why We Don’t:

• Restrictions may apply if you choose to transfer your 529 Plan funds to another child.

UTMA or UGMA (Uniform Transfer/Gift to Minors Act)

An UTMA/UGMA differs from ESAs and 529 Plans in how they aren’t designed just for education savings. The account is in the child’s name but is controlled by a custodian (usually a parent or grandparent). This person manages the account until the child reaches age 21. At age 21 (age 18 for the UGMA), control of the account transfers to the child to use any way they choose.

Why We Like It:

• Funds can be used for more than just college expenses
• Tax advantages for the contributor

Why We Don’t:

• Beneficiary can use money however they choose once of legal age (pay for college or a sports car)
• Beneficiary can’t be changed after selected

College Savings Tips for Students

You as the parents don’t have to be the only source for college savings. Get your kids involved in the effort. Even though your child is a full-time student, there’s no reason they can’t start building up their own savings fund. At the very least, doing this will help establish healthy money habits they’ll carry into the future.

Here are some great college saving tips to help them get started:

1. Apply for scholarships

It’s free money for college that you don’t have to worry about paying back. If your child excels in athletics, academics or extracurricular activities, they should try to get rewarded for it. Encourage your child to apply for any scholarship they’re eligible for—even the small ones add up fast! 

2. Take AP classes

Advanced Placement (AP) classes give high school students the opportunity to earn college credits while they’re still in high school. Every AP class taken in high school is one less class you’ll need to pay for in college. Advise your child to talk to their academic counselor for more information.

3. Get a job

Whether they take on a full-time gig during the summer or a part-time job during the school year, your child will be able to save money for college and gain work experience to put on their resume.

4. Open a savings account

If your student is serious about building up their college savings, they’ll need a safe place to keep all that money. Most banks offer accounts specifically for students, which usually means waived monthly maintenance fees and no minimum balance requirements. If your child is under 18, you’ll need to be the joint account holder.

5. Save money instead of spending it

If your child gets birthday money or an allowance, suggest they put it right into their savings account so they aren’t tempted to spend it.

It’s Time to Get Serious About Saving for College

It’s never too early to start thinking about a college savings plan. Whether your child is a teenager or toddler, the best time to start a college fund is now.

8. My company decided to defer my payroll taxes for the remainder of 2020. What does that mean?

Some workers might have noticed that their paychecks got slightly bigger during the last few months of 2020. That’s because the Trump administration signed an executive order that allows companies to defer payroll taxes (Social Security payroll taxes, to be specific) from Sept. 1, 2020 to Dec. 31, 2020.

So, if you’re a federal government employee or work at a company that decided to defer your Social Security payroll taxes for the rest of 2020, you saw a temporary 6.2% bump in your paychecks. Don’t jump for joy just yet, because there’s a catch.    

The key word here is deferred. This is not a tax break—those taxes still need to be paid. That means companies will have to make up that money between January and April 2021, so you’ll be seeing less money in your paycheck during that time. So, brace yourself for that!

9. I tested positive for COVID-19 and piled up a bunch of medical expenses as a result. Can I deduct those costs from my taxes?

It depends. The IRS lets you deduct medical, dental and other health expenses that fall above 7.5% of your adjusted gross income (that’s the part of your income that is taxable) for the year.

For example, if your adjusted gross income is $50,000, first you would multiply that by 7.5% to find out that you can only deduct expenses that exceed $3,750. If you spent $5,000 in medical expenses in 2020, that means you can only deduct $1,250 in medical expenses.

But here’s the kicker: You can only deduct medical expenses if you choose to pass on the standard deduction and itemize your deductions instead. 

Does it make sense to itemize your deductions? For 2020, the standard deduction is $12,400 for single filers and $24,800 for married couples. It really only makes sense to itemize if your itemized deductions (including medical expenses) are greater than the standard deduction, so choose wisely!

10. I’m a small business owner who took out a PPP loan. How will that impact my taxes?

The CARES Act didn’t just set out to help individuals and families—it also tried to provide some financial assistance for struggling small business owners by offering them Paycheck Protection Program (PPP) loans. These loans were designed to be “forgiven” as long as they were used for certain business expenses—particularly payroll, rent or interest on mortgage payments, and utilities.

And while income from debt forgiveness usually counts as taxable income, the CARES Act makes an exception for PPP loan forgiveness. That means that as long as you used those PPP funds for eligible expenses, that money will not be taxed . . . as long as your loan forgiveness application is approved (more on that in a minute).  

But there are a few problems (aren’t there always?): The IRS says that any expenses you paid with money from those PPP loans cannot be deducted from your taxable income. So, if you applied for a PPP loan, borrowed $100,000, and spent all of that money on payroll, rent and utilities, you won’t be able to deduct a dime of those business expenses from your taxes like you normally would.

Many members of Congress are saying, “Wait a minute, we didn’t mean for that to happen!” But unless they pass legislation to make those expenses deductible, you won’t be able to take those deductions like previous years.

Oh, and all that “forgiveness” business? As of October 2020, the Paycheck Protection Program dished out $525 billion in loans to 5.2 million borrowers . . . and not a single loan has been forgiven. Borrowers and banks are frustrated with the Small Business Administration’s handling of loan forgiveness applications and confused about next steps. Surprise, surprise.   

Do not take out a PPP loan! We hate to tell you “we told you so,” but . . . we told you so. President Ronald Reagan once said that the nine most terrifying words in the English language are “I’m from the government, and I’m here to help.” He might have been onto something!

Got Questions? Work with a Tax Pro!

Without a doubt, this tax season is going to be a hot mess for millions of Americans who have seen their lives turned upside down by this pandemic. If you’re one of them, it might be a good idea to reach out to a tax advisor who is up-to-date on the latest news and changes for this tax season.

If you want to make sure you get your taxes done right and avoid making huge tax mistakes that could cost you hundreds or thousands of dollars, go to a Professional Tax Preparer.