Spring 2017 Issue of Horizons

Most people do not think of tax planning until the end of the year, right before the big tax bill hits, and by then it is sometimes too late to take action. Tax planning is a year round exercise, so now is the perfect time to start thinking about how you can reduce your 2017 income tax liability. The following are various tax planning strategies you should consider throughout the year in order to minimize your tax bill and increase tax savings. Education Savings Vehicles As the cost of education continues to rise, it is important for taxpayers to consider effective tax planning strategies to help cover some of the increasing costs. Since college aid is not always available to higher- income families, it is important to identify options that are available to any and all taxpayers, regardless of income. The following are a few ideas to consider when planning for future educational expenses. 529 Plans A 529 plan, also referred to as a Qualified Tuition Plan, is a tax-advantaged savings plan used to encourage savings for future college expenses. There are two types of 529 plans: savings and prepaid plans. Savings plans are similar to investment accounts in which your contributions are invested in mutual funds or similar investments. The entire balance in this account is available to be used at any accredited public, nonprofit or private college or university. Prepaid plans allow you to pre-pay all or part of future college costs. In effect, you are purchasing future college tuition at today’s prices. While these state programs are set up to cover in-state tuition, some states have provisions that allow the savings to be used for tuition at a private or out-of-state school. There is no guarantee, however, that the tuition purchased will cover the same credits at another school. Although contributions are not deductible for federal tax purposes under either type of plan, earnings in a 529 plan grow tax-free as long as the money is ultimately used to pay for qualified higher-education expenses. Many states, however, do offer state tax benefits by offering a deduction or a credit for a contribution to the plan. If earnings are withdrawn from the plan and used for non-educational purposes, the income is subject to income tax as well as a 10% penalty. If the funds are no longer needed for the beneficiary’s education, most 529 plans are flexible in that they provide the ability to change the beneficiary of the account to another qualifying family member. While your investment options for a 529 plan are directed by the state plan, you can change your investments twice a year. Furthermore, if you decide you don’t like the 529 plan originally selected, you can rollover your funds into another 529 plan allowed once every 12 months. A 529 plan is a savings vehicle that anyone can take advantage of. There are no income limits, age limits and the contribution limits, while varying by state, are generally high. It is important to keep in mind, that the deposits made to the plan are considered gifts and, therefore, could be subject to gift tax.

Spring 2017

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