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Recent Tax Court decision could wreak ha

Glover v. Comm, a recent tax court decision, presents several issues to Merchant Mariners. Mr. Glover worked for Reinauer Transportation. His tugs pushed oil coastwise as far as Virginia. The tugs wou

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Recent Tax Court decision could wreak havoc on Mariners

State Taxes and Mariners

Suz asked this question So, what about if you live in one state (TN) and work as a merchant mariner in another state (HI), 45 days on/45 days off rotation? Do you pay HI state taxes, or does the payro

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State Taxes and Mariners

Mariner Tax Update January 2011

E-Filing alert! How many times have you read that mariners cannot E-File? How many websites have posted this. Year after year. And then all of a sudden preparers start proclaiming “mariners can

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Mariner Tax Update January 2011

Employee vs. Non-Employee LLC and S-Corp

I’ve been a client of yours for a few years now and I had a general tax question concerning my wife’s job status. She currently works full time for a marketing firm in “Deleted”

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Employee vs. Non-Employee LLC and S-Corp Planning for Mariners and their families

Maritime Tax Preparers and the Alternati

What they don’t want you to know… This video points out the tremendous effect of the AMT on merchant mariners. Seamen taking business deductions and offsets may very well be realizing litt

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Maritime Tax Preparers and the Alternative Minimum Tax

Understanding 529 Plans

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by on November 5, 2010 at 2:04 pm

529 Plan Benefits in Massachusetts under the Pension Protection Act

College PlanningWhether you’re a parent with future educational obligations for young ones, or perhaps a loving aunt, uncle, grandparent, or stepparent, now more than ever 529 plans are an attractive tool for the escalating costs of education, as well as for income and estate planning purposes. This is because one of the hidden gems of the new Pension Protection Act of 2006 (signed into law on August 17, 2006) is a provision that makes permanent the income-tax-free growth of Section 529 plans used for qualified higher education expenses. Prior to this new law, these provisions would have expired December 31, 2010.

Planning Tip: The new Pension Protection Act makes permanent the income-tax- free growth of 529 plans, but only for withdrawals used for qualified higher education expenses. Funds used for other expenses are tax deferred (like an IRA) and subject to a 10% penalty.

Most wealth planning professionals (and clients for that matter) understand the value of investing in 529 plans. 529 plans are by far the most popular college savings vehicle, but they’ve just become even more popular. According to a recent survey, 54% of parents with young children who do not currently own a 529 account are more likely to open one now, due to the new law, and 36% who already own a 529 plan say they are now more likely to increase the amount they contribute to existing plans. And another recent survey confirmed that older clients may want to learn more about college savings.

Income Tax Benefits

While many clients understand the educational savings benefits, many do not understand the benefits of investing in 529 plans for income tax purposes. Just like with an IRA, the power of tax-deferred growth makes 529 plans worthwhile even if not used for educational expenses. The ability to frontload up to five years of annual exclusion gifts, or $60,000 per beneficiary ($120,000 per beneficiary for married couples), without paying gift tax creates the ability to grow a significant amount of money tax free. In addition, many states offer residents a state income tax deduction for an investment in their state’s 529 plan.

Planning Tip: Clients should consider an investment in a 529 plan even if it is not anticipated that the funds will be used for educational purposes. The income tax benefits alone of 529 plans make these very worthwhile investments.

Estate Planning Tax Benefits

529 plans are unique in that you can invest in a 529 plan, retain absolute control over the assets, and yet remove those assets from your estate for estate tax purposes. This type of control typically means that the asset would be subject to estate tax at a 46% rate (in 2006) at death, but not with a 529 plan. Thus, clients can invest up to $60,000 per beneficiary ($120,000 per beneficiary for married couples) without paying gift tax and, if the client lives for at least five years, all of these assets will not be subject to estate tax. More importantly for many clients, a 529 plan allows them to use the 529 plan assets in a financial emergency.

Planning Tip: Clients should also consider 529 plans for estate planning purposes to remove significant wealth from the estate tax while retaining the ability to use the assets in a financial emergency.

Educational Trusts

Many 529 plans permit a trust to be the owner and beneficiary of accounts set up under that states plan. A 529 plan combined with an Educational Trust may provide more flexibility to ensure that the 529 meets the client’s objectives by, for example, moving assets between siblings or providing a smooth transition should the client become incapacitated or die.
This combination of 529 plans and specially designed trusts can also provide divorce and creditor protections, even for those states’ 529 plans that do not provide their own asset protection; for example, to ensure that the 529 plan’s assets do not end up in the hands of a former son-in-law or daughter-in-law. And the client still retains the ability to use the funds in a financial emergency.

Planning Tip: Consider combining 529 plans with Educational Trusts to provide the greatest flexibility and to ensure that the 529 plan assets meet each client’s particular planning objectives.

Conclusion

Now more than ever, clients and attorneys should consider 529 plans for educational savings, income tax benefits and estate tax benefits; and when combined with a carefully-crafted Educational Trust, they will provide added flexibility to control this asset and to ensure that it meets your planning objectives.

Student Loan vs. Mortgage

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by on November 4, 2010 at 9:46 pm

Should I keep my student loans or should I roll them into my existing mortgage? How much lower should my mortgage rate be for it to make a difference?

Usually this is a quick yes… If all the stars are right. If you were refinancing and were able to pay off a student loan, it’s probably a good idea.

Loan Factors

If rates aren’t hurt because of this and closing costs aren’t increased drastically you’re saving in the long run by lowering the effective interest rate.

Interest Spread

How much lower should the new rate be before you decide? Actually the rate could be higher and still be effectively less. ??? You are only allowed to deduct a maximum of $2,500 in student loan interest on your income tax return. You start to lose this deduction at $55,000 (single) and $110,000 (married). So a married couple earning $150,000 annually would not be able to deduct any student loan interest on their income tax return.

What is the cash value of the lost deduction?

It depends. Ironically, the folks you earn more are in higher tax brackets and would benefit more. If we assumed the married couple earning $150,000 is in the 25% tax bracket we can assume a 25% return on deduction if they were already itemized.

Let’s do an actual example -

Single Attorney Earns $120,000, and is in the 25% bracket after deductions. He has $100,000 in student loans at 6% for 15 years. Making things simpler we’ll apportion the interest evenly over the life of the loan.

The total interest paid would be approximately $51,894. That’s $3,459 a year (cheating for simplicity). 25% of that is $865.

So over the life of the loan the interest deduction would have been worth $12,974 (865*15 years)

That said – The cost of the Student Loan at 6% is $64,867 (interest plus the lost tax deductions)

If we had the same loan as a mortgage or equity loan at 7%, we’d pay $61,789 in interest. Essentially we maintain a financial advantage refinancing at a higher rate!

Financial Decision Making

This shoe doesn’t fit everyone perfectly. You should consult with your tax advisor to see how you fit into this equation. There are other factors that need to be weighed before making this decision. For example, refinancing and paying off student loans would not be wise if it raised the overall interest rate. You would end up paying a higher rate on the entire mortgage.

This is definitely something to put under consideration and mention to your tax planner.

Mariners off the IRS dirty dozen!

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by on November 4, 2010 at 12:03 am

Uncle Sam’s Hitlist…

When will they mention the millions they lost on fraudulent home buyer credits? Probably after the election I’d say. Here’s their list for 2010…

Return Preparer Fraud

Dishonest return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds, charging inflated fees for return preparation services and attracting new clients by promising refunds that are too good to be true. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued injunctions ordering hundreds of individuals to cease preparing returns and promoting fraud, and the Department of Justice has filed complaints against dozens of others, which are pending in court.

To increase confidence in the tax system and improve compliance with the tax law, the IRS is implementing a number of steps for future filing seasons. These include a requirement that all paid tax return preparers register with the IRS and obtain a preparer tax identification number (PTIN), as well as both competency tests and ongoing continuing professional education for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents. (more…)

in IRS Updates