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Free eNewsletter & Special Promotions
Volume 3, Issue 5, August 2005
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| In Focus | ||
| • | Education Savings Accounts | |
| • | Does Your Child Need to Pay Taxes? | |
| • | Child and Dependent Care Credit | |
| • | Retirement – A Little Help? | |
| • | Protecting Your Student's New Computer | |
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As tuition and other educational expenses continue to increase, it is becoming more important than ever to start saving to finance your child’s education, and an education saving account (ESA) is one viable option for doing so. Contributions to an ESA accumulate earnings on a tax-deferred basis, and distributions are tax and penalty free, as long as the funds are used for qualified education expenses. Additionally, contributions are nondeductible and discretionary – you do not have to contribute to the account every year.
An ESA can be established for any individual under the age of 18, but cannot be established for an unborn child. The balance of an ESA must be distributed within 30 days of the beneficiary reaching age 30. Should the beneficiary die or accumulate no qualified education expenses before the funds are used, the balance may be transferred to a qualified family member who has not yet attained age 30.
In order to be eligible to contribute the maximum $2,000 per year to an ESA, your modified adjusted gross income must not exceed $95,000 for single filers and $190,000 for joint filers. Filers whose modified adjusted income falls in the phase out range of between $95,000 and $110,000 for single filers and between $190,000 and $220,000 for joint filers are only eligible to contribute a percentage of the contribution limit.
ESA contributions must be made by April 15, and regular contributions to an ESA must be made in cash, while transfers and rollovers from other ESAs may be made in securities. The financial institution determines the restrictions on the types of investment options offered by the ESA, and some allow you to choose among a list of pre-selected investments, including stocks, bonds, mutual funds, real estate, money market funds, and some coins.
Distributions from ESAs are tax-free when they are used for qualified educational expenses, which include certain elementary and secondary education expenses in addition to post-secondary education expenses. Distributions used for other purposes are subject to tax and an additional 10% early-distribution penalty fee if the distribution was taken from the ESA’s earnings.
For more information about investing in an Education Savings Account, contact Kemper CPA Group LLP today.
If your children have been hard at work this summer – delivering newspapers, mowing lawns, babysitting, waiting tables, working at the pool, etc. – they may be required to pay taxes on their summer income. Income generated by students, including pay for services performed and self-employment income is taxable. When helping your child figure how much income to report, include everything received as payment for services performed, including wages, salaries, and tips.
Additionally, consider the following specific income sources:
Tips: All tips received are considered income, and are therefore taxable. Tips may be received directly from customers, split with other employees, or charged on customer credit cards. Your child should keep an accurate record of all tips received, including the cash value of non-cash tips he or she receives (e.g. tickets). The IRS recommends using Form 4070A, Employee’s Daily Record of Tips. Additionally, tips totaling $20 or more monthly should be reported to the employer. You can use Form 4070.
ROTC: If your child receives subsistence allowances as part of Reserve Officers’ Training Corps (ROTC) advanced training, those funds are not taxable. If income is received as active duty pay during summer advanced camp, for example, that income is taxable.
Self-employment income: Earnings your child received from self-employment – lawn mowing or baby-sitting, for example – are taxable. Additionally, if your child’s net earnings (income minus allowable business expenses) exceed $400, he or she will have to pay self-employment tax, which pays social security benefits. More information about self-employment tax is available in Publication 533, Self-Employment Tax.
Newspaper carriers: Specific rules apply for newspaper carriers and distributors. If your child is involved in soliciting customers and delivering receipts for newspapers, his or her pay relates directly to sales (not the number of hours worked), and he or she works under a written contract that states that he or she will not be treated as an employee for tax purposes, then your child is considered self-employed for federal tax purposes. Carriers or distributors under the age of 18, however, are not subject to self-employment tax.
In addition, certain scholarships and fellowships received by your college-age children may be taxable.
Determining whether your child needs to pay taxes on summer income can be complicated. For further explanation of the rules surrounding the employment of your dependents, contact Kemper CPA Group LLP today. We can help!
If you paid someone to care for a child or dependent so that you could work this summer or at any other time this year, you may be able to claim a child and dependent care credit on your federal income tax return. Claiming the credit would allow you to reduce your tax by a percentage of the amount of expenses incurred for child care services for a dependent under age 13 or for a dependent of any age who is incapable of self-care.
The credit is intended to help cover your child-care expenses so you can work or look for work, and depending on your income, the credit could range from 20 to 35 percent of your qualifying expenses. If you receive dependent care benefits from your employer, the expenses you claim for the credit must be reduced by that amount.
In addition, if you are married, both you and your spouse must be employed or searching for employment, unless either of you is a student or is mentally or physically incapable of self-care.
Additional requirements also apply:
| • | Your filing status must be single, head of household, married filing jointly or qualifying widow(er) with a dependent child. |
| • | The payments for child care cannot be made to someone you can claim as your dependent on your return or to your child who is under age 19. |
| • | You (and, if you’re married, your spouse) must maintain a home that you live in with the qualifying child/dependent. |
Taxpayers using Form 1040 can use Form 2441 to verify the name and taxpayer identification numbers for care givers working for a child-care business and/or to report the social security numbers of individual providers. If you are filing Form 1040A, you must complete Schedule 2. Also keep in mind that if you pay someone to provide the care from your home, you may be considered a home employer and would have to pay employment taxes.
If you would like more information on claiming the Child and Dependent Care Credit or more specific information pertaining to your child-care situation, contact the tax professionals at Kemper CPA Group.
When you think about retirement planning, many questions may come to mind, such as:
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| 1. | How much will I need to save for retirement to live comfortably and still allow for emergencies? |
| 2. | What kind of taxes will I have to pay on my savings when I retire? |
| 3. | Which is best for me – a Roth IRA, a 401(k), or both? |
| 4. | How can I plan now to minimize my tax burden after I retire? |
| 5. | How do I possibly pick the right funds or plans in which to invest my money? |
| 6. | A little help??! |
If you feel a little concerned, confused, or otherwise overwhelmed with the concept of retirement planning, take heart – help is available! The professionals at Kemper Capital Management can sit down with you to review your current earnings and asset structure, and help create a retirement plan that will be most beneficial to you. Through an ongoing process, Kemper Capital Management will help answer the questions, review and plan for the tax implications, determine how much you need to set aside yearly for retirement savings, and monitor the status of your investments in relation to market conditions.
Employers are attempting to help their employees by automating many of the processes involved with retirement plan enrollment and administration, including automatically enrolling eligible employees in the program, annually increasing their contribution amounts, rebalancing accounts on a yearly basis and providing information via menu-driven phone systems. While automation of many of these functions is designed to be helpful, it is important to continue to talk with an experienced, knowledgeable professional on a regular basis to ensure your retirement plan is on track in relation to your income and assets, which will change over time. The friendly, skilled professionals of Kemper Capital Management can help – contact us today!
Investment advisory services offered by KCPAG Financial Advisors LLC, a registered investment advisor. Securities offered through CapPro Brokerage Services, Inc., member NASD & SIPC. Insurance services offered through KCPAG Insurance Services LLC.
Before you send your college student off with that brand new computer, take some time to help your child secure it and protect your investment. Because an attack on your new computer can occur literally just minutes after you take it out of the box and connect it to the Internet, it is important to take steps to secure it right away.
Install a firewall: If your child’s new computer is operating Windows XP, there is a built-in firewall. Make sure that it is enabled, but also be aware that this built-in firewall protects you from outsiders trying to get in, but does not protect your outgoing data. For added security, also install a software firewall, which will alert you whenever a program tries to access the Internet.
Install antivirus software: Many new computers come with a trial version of an antivirus software; make sure you keep the virus definitions updated, and when your trial period is up, remember to purchase a full version.
Keep Windows updated: Check for Windows updates regularly. Windows XP Service Pack 2 (SP2) is installed on many new computers, but additional updates were made available after its release. And if your computer did not come with SP2 installed, install it, and keep it updated.
Prevent spyware installation: Install a spyware blocker, which will keep unwanted spyware and adware programs from taking over your computer. The pop-up windows that usually accompany spyware aren’t just annoying – some expose your computer to viruses and worms.
Modify your Hosts file: In addition to installing a spyware blocking program, you should also keep your Hosts file updated with known malware and ad server domain names. If you enter these domain names in your Hosts file with your computer’s IP address, attempts to reach these ad servers will be rerouted back to your computer, effectively killing the request. Doing so will further protect you from adware and “tracking cookies” which alert ad servers to your web surfing habits and target ads based upon this data.
Disable file sharing: If your child is storing sensitive data on his or her computer, it is important to disable file sharing, which is turned on by default in Windows XP Professional and Windows XP SP2.
Many colleges and universities offer assistance for students with computer-related questions and problems. Check with the information technology department at your child’s school for additional information related to using his or her computer on the school’s network. The professionals at Kemper Technology Consulting are here to help you with your information technology needs. Contact us today with any questions or concerns you have about getting your child’s new computer up and running.
Kemper Technology Consulting
Robinson, IL
618-546-5633
www.kempertc.com
Evansville, IN • Indianapolis, IN • Paducah, KY
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