As part of the 2020 Tax Update and Review Conference Virtual Conference series, we field questions from our students throughout the presentation. We have highlighted some of the common questions and the answers you might find valuable.
Lesson 6 covers Coverdell savings accounts, employer education assistance, American Opportunity and Lifetime Learning education credits, how to allocate scholarship funds to maximize education credits, qualified state tuition programs (Sec 529 plans), ABLE accounts, military moving, higher education interest, foreign earned income exclusion, savings bond education exclusion, worker’s compensation, above-the-line education expense deduction, and the educator’s above-the-line deduction.
QUESTION: Can the 529 withdrawal be made up until filing deadline, allowing for tax prep first?
ANSWER: Apparently, reimbursements from the 529 plan can be made in a year other than the year of the expenses since the code and publications are all silent on the issue.
QUESTION: Regarding the AOTC - It is for the first 4 years of post-secondary education. More and more students are taking college classes while finishing their high school studies. Are they eligible for AOTC although they aren't yet post-secondary, but are taking post-secondary courses?
ANSWER: An eligible student for the AOTC must be enrolled at an eligible educational institution for at least one academic period beginning in the tax year of the credit and must be enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. So simply taking a course or two at the college level will not meet the half-time requirement.
However, the student may qualify for the Lifetime Learning Credit. Although it does include the “one academic period” requirement, there is no “half-time student requirement. Both the AOTC and the LLC details are included in chapter 5.03 of the seminar text (Big Book of Taxes).
QUESTION: In regard to form 5500/5500EZ filing requirement – Is one participant (owner) SEP IRA having assets over $250,000 required to file form 5500EZ?
ANSWER: A one participant SEP plan is not subject to the 5500-filing requirement.
QUESTION: Can EE Savings Bonds (Inherited) be used to pay student loans and get the tax benefit same as if it was used to pay qualified higher education expenses?
ANSWER: The individual must have bought the bond(s) after reaching age 24 (Code Sec. 135(c)(1)(B)) and must be the sole owner (or joint owner with spouse). The exclusion isn't available to the owner of a bond that was bought by another individual (other than a spouse). Nor is it available to a parent who buys the bonds and puts them in the name of a child or other dependent. But the owner may designate an individual (including a child) as the beneficiary for amounts payable at death without losing the exclusion.
QUESTION: Does a very low IQ count as a disability to quality for this?
ANSWER: I assume you are referring to an ABLE Account... An individual is an eligible individual for a tax year if, during that tax year:
- The individual is entitled to benefits based on blindness or disability under the Social Security disability insurance program (title II of the Social Security Act) or the SSI program (title XVI of the Social Security Act), and that blindness or disability occurred before the date on which the individual reached age 26, (Code Sec. 529A(e)(1)(A)) or
- A disability certification for the individual has been filed with IRS for the tax year. (Code Sec. 529A(e)(1)(B))
A disability certification is one made by the eligible individual, or his parent or guardian, that certifies that:
- The individual has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months, or is blind, within the meaning of Sec. 1614(a)(2) of the Social Security Act (Code Sec. 529A(e)(2)(A)(i)(I)), and
- That blindness or disability occurred before the date on which the individual attained age 26. (Code Sec. 529A(e)(2)(A)(i)(II))
The certification must include a copy of the individual's diagnosis relating to the individual's relevant impairment(s), signed by a licensed physician meeting the criteria of Sec. 1861(r)(1) of the Social Security Act. (Code Sec. 529A(e)(2)(A))
QUESTION: How about when a scholarship pays tuition?
ANSWER: If the scholarship is tax-free, then the tuition paid by the scholarship does NOT qualify for education credits. However, please see page 5.03.06 of the Big Book of Taxes that includes a strategy to allocate scholarship funds to maximize tuition credits.
QUESTION: How does one exclude foreign earned income if their work in a foreign country starts during the year where they weren't a resident for the entire year, nor did they meet the 330-day test? Is there a proration?
ANSWER. The physical presence test is based upon a 12-month period, not a calendar year. 330 full days in a 12- month period. Thus, in the first and last year a taxpayer will virtually always prorate the exclusion. There is an in-depth discussion and illustration on page 6.03.04 of the Big Book of Taxes.
QUESTION: Does a very low IQ count as a disability to qualify for an ABLE account?
ANSWER: An eligible beneficiary - must be severely disabled before turning age 26, based on marked and severe functional limitation or receipt of benefits under the SSI or Disability Insurance (DI) programs. However, an individual does not
QUESTION: This question is regarding inheriting an IRA that needs to be distributed within 10 years. Is the beneficiary allowed to convert it to Roth as a strategy to pay the required tax but still keep the proceeds in a Roth IRA?
ANSWER: I do not believe so. The SECURE Act does not address that. But I believe the answer lies in the fact that the funds cannot be rolled into a beneficiary’s account and must remain in the decedent’s account until distributed. Thus, it seems to me the beneficiary has no right to roll the decedent's account into a ROTH. At least that is my take on the issue.
QUESTION: I have a grandmother who bought these for her grandchildren when they were young, grandchildren now in college. If they cash them and use for college, is it tax-free? It doesn't sound like it unless I missed something
ANSWER: An individual who pays qualified higher education expenses with redemption proceeds from Series EE or I bonds issued after ’89 can potentially exclude from income the bond interest. No exclusion is available to a taxpayer using the married filing separate filing status. Form 8815 is used to compute the exclusion. Form 8818 may be used to keep a record of such bonds. The bonds must meet the following requirements for the exclusion to apply:
- They must be purchased by an individual over age 24.
- The purchaser must be the sole owner (or joint owner with spouse).
- The owner may designate a beneficiary for the bonds without losing the exclusion.
- A phase out applies for a taxpayer with “modified AGI” that exceeds the amount shown in the table on page 6.04.02 of the seminar text. .
QUESTION: I have a taxpayer asking how many times this account can be transferred and what else can be done with the funds if not used for education?
ANSWER: Actually, there is no specific limit on how many times a 529 plan can be transferred without the earning being taxable and not being a taxable gift so long as the new beneficiary is:
(1) Is a member of the family of the old beneficiary, and
(2) Is assigned to the same generation as the old beneficiary.
The principle amount of the 529 plan if withdrawn is never taxable. However, if the earnings from the 529 Plan are withdrawn and not used for qualified education expenses, the earnings withdrawn will be subject to both regular taxes and a 10% penalty. When applicable, the penalty is computed on Form 5329.
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