Upcoming Deadlines for Practice Owners

Everything takes time and nothing these days seems to be easy.  With that in mind, please be aware of the following deadlines coming up during the second half of 2024:

12/31/24: Filing the Beneficial Owner Information Report:

In 2024, a stringent new filing requirement takes effect under the Corporate Transparency Act. The act compels all qualifying small businesses, including S-Corps and LLC, to disclose certain identifying information on “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN).

Penalties for noncompliance are extremely steep, so we are strongly urging all small business owners to make CTA compliance a priority. Please read through the compliance guide on your own, or plan to work with an attorney to gather the required information, complete the BOI report, and then submit to FinCEN prior to the January 1, 2025 deadline.

Learn more by reading these articles posted on our blog:

90 Days After Setting Up a New Entity:

While existing businesses set up prior to 1/1/24 don’t need to file under the new CTA rules until 1/1/25, new businesses established after 12/31/23 have a much shorter window to comply.  The revised rules give new businesses set up in 2024 only 90 days to file. Starting in 2025, new businesses only have 30 days to file. For that reason, please ensure that the lawyer who is setting up your new business will take care of this time-sensitive filing as part of the services they are providing.

Learn more by reading through this article posted on our blog:

8/30/24: Opt into $5.6B Visa and Mastercard Settlement

Good news for procrastinators and class action skeptics.  You now have until 8/30 to register your practice to receive a tiny percentage of a whopping $5.6 billion settlement related to merchant fees paid between 1/1/2004 and 1/25/2019.

Learn more by reading this article posted on our blog:

Returning Money to a 529 Plan

If you run into a situation where your child stops attending their college or university part way through a semester and as a result tuition and other college costs that were paid using your child’s 529 plan are returned to you, what options are available to you with regard to this unexpected refund of college payments?

The easiest option is to return the funds back into the 529 plan that the funds came from.  Or you can fund a different 529 plan as long as the 529 plan pertains to the same beneficiary (child).  There is a strict timeline involved with this option – the funds need to be recontributed back to the 529 plan within 60 days from the date the check was issued by the educational institution.  Missing this 60-day window will result in taxes plus a 10% penalty on the earnings portion of the 529 plan funds returned to you.  We also recommend contacting the 529 Plan’s customer service to determine other documentation that might be required by the 529 plan in recontributing the funds.

Additionally, there are a few other options when students are refunded tuition that was paid from 529 plan distributions:

  • First, you can use the returned funds to pay for other qualified college costs for this same child. However, the funds must be used in the same year and if not used for qualified educational expenses by year-end, then the earnings portion of the refund allocated to the 529 plan funds becomes a taxable event, plus the 10% penalty as noted above.  If risk and/or uncertainty exists on using the funds for this beneficiary elsewhere, then this option may not be the best option.
  • Another option would be to use these funds to pay down educational debt. However, there is a lifetime limit of $10,000 on the repayment of student debt using 529 plan distributions.  This lifetime limit is per borrower (child).
  • The final option would be to keep the money and pay the taxes on it. If keeping the funds and paying taxes, have the funds distributed in your child’s name.  The receiver of the refunded costs related to the 529 plan funds will be the one required to report the amount as income on their tax return.  Most likely, your child will be in a low tax bracket.  If the refund is sent to the account owner/parent, most likely the tax burden would be higher based upon the parents being in a higher tax bracket than the child.  And whether the college returns the funds to the parent or child, in this situation, the 10% penalty is not avoided.

Planning for Your Child’s Upcoming Semester Abroad

Although your child may have just returned home from college in the past few weeks, it’s probably on your radar to begin planning for your college payments for the upcoming semester in the fall or perhaps a summer program.

But what if attending a foreign university abroad is the plan for your child’s next semester. Spending a semester or year abroad at a foreign university is common for many US students; generally, an opportunity offered to students in their junior year at college. If your child will be attending a foreign university in the coming year, 529 plan distributions may still qualify to be used for foreign educational expenses. US universities that offer a study-abroad program will be 529-plan eligible to pay for those college costs as long as your child’s US college accepts the foreign university study-abroad academic credits. Additionally, if your child plans to attend all four years and be fully enrolled at a foreign university, as long as the foreign university participates in the US federal student aid program and such host school is approved by the US Department of Education then the foreign college costs would be 529-plan eligible as well.

Several hundred foreign educational institutions qualify to use 529 plan distributions. Parents and students can check this link provided by the savingforcollege.com website to determine if a student’s foreign (and US) educational institution qualify for the 529 funds to be used for education costs.

One final note on foreign college expenses and qualifying 529 plan distributions, travel costs related to attending the foreign university are not 529-plan eligible (qualifying) expenses. However, costs such as tuition & fees, books, and room & board are all 529-plan eligible expenses when used to pay for US study-abroad programs and for enrollment at a foreign university. A full list of qualifying and non-qualifying 529 plan distributions can be found on our website here.

Business Owners Should Consider Hiring Their Kids This Summer

If you are self-employed and have children that are old enough to work, consider adding them onto your company payroll. Below are 5 key tax benefits and retirement planning opportunities that families will qualify for when shifting earned income within the family by hiring their children as employees of their small business.

1. Income received up to the federal standard deduction are tax-free. Thus, for 2024, the first $14,600 of wages paid to your child are federally tax-free income to your employed child. Because the 2024 standard deduction is $14,600, this allowed federal tax deduction will offset the wages paid to your child and no federal taxes would be owed from the paid wages up to this threshold. And the wages paid to your children from your business is an allowed business expense (tax deduction) reducing the business owner’s taxable income and resulting taxes. A great tax planning strategy to reduce a family’s overall taxes!
2. The wages paid to your child can be contributed to a Roth IRA. Wages are considered earned income for IRA contribution qualification purposes. A taxpayer can contribute annually to a Roth IRA subject to earned income limits. For 2024, the maximum IRA contribution is the lesser of earned income or $7,000. Starting retirement planning at such a young age will help introduce your child to good financial habits. Additionally, the invested retirement funds have the potential to grow immensely over your child’s lifetime.
3. For your college age kids, the wages paid by your business to your kids can be used to pay their higher education expenses. Thus, a small business owner would indirectly be getting a tax deduction for payments to their children’s colleges and private schools.
4. Depending on what type of retirement plan you may have in place for your company, the wages paid to your children may also qualify them to be in your business’s retirement plan. Not only would you be decreasing your income taxes by deducting a larger business expense related to the retirement plan contribution for your kids, but you would also be increasing your family’s overall retirement planning opportunity and tax deferral of income.
5. If your business is set up as a Schedule C (sole proprietor or single-member LLC), the wages paid to your children that are under age 18 are not subject to social security or Medicare taxes. This payroll tax savings for the family can be as high as 15.3% of the wages paid to your children, in addition to the income taxes saved. Additionally, if your child is under age 21, your child is also exempt from federal and state unemployment taxes paid by the company.

A few considerations when paying your children. Document the work being performed by your children and maintain a log of their actual hours worked per pay period. They should be doing actual work based upon the business needs and the child’s abilities. Be sure the hourly rate paid to your children is reasonable and not overly excessive for the work they are hired to do. And pay your children at the same time that you pay other employees and on the same pay cycle. You will need to issue a W-2 to each employed child as well. In the eyes of the IRS, record-keeping is key to document that the payments to your children truly qualify as a valid business expense for actual work performed. Thus, if your business is ever audited by the IRS, the IRS will want to confirm that both the work completed by and total hours worked by your children for the period under audit are accurate.

Guidance on Completing Your Child’s Form W-4 for Their Summer Job

When your child begins their summer job and will be paid as a W-2 employee, their new employer will require them to complete a Form W-4, Employee’s Withholding Certificate. The purpose of the form is to instruct the employer how to withhold income taxes from your child’s weekly paycheck. However, if your child’s expected wages will be small (less than $14,600 in 2024), then he or she will be allowed to claim an exemption from federal tax withholdings from their wages. To claim this exemption, they must meet the following qualifications:

1. Last year your child had no federal income tax liability, and
2. This year your child expects to have no federal tax liability again.

To claim this special exemption on the Form W-4:

1. Complete Step 1 (name and address).
2. Leave blank Steps 2, 3 and 4.
3. In the space below Step 4(c), your child will write “Exempt”. By claiming “Exempt” no federal income taxes will be withheld from your child’s pay.

Assuming your child has no significant investment income and their wages earned will be less than $14,600 (the standard deduction for 2024), then there will be no federal tax liability for your child for 2024. Additionally, if no federal income taxes are withheld, your child’s wages are below $14,600 for 2024, and there is no other income received by your child; then no federal tax return will be required to be filed by your child. One final note – Although there will be no federal income taxes withheld from the paycheck when claiming “Exempt” status, your child will still be subject to social security and Medicare taxes being withheld from his or her paycheck.

Plan Ahead To Use 529 Contributions To Fund A Roth IRA For Your Child

Beginning in 2024 excess funds held in a 529 college savings plan will be eligible to be rolled over to a Roth IRA for the beneficiary.

For families who contributed to 529 college savings plans for their children and did not fully exhaust the accounts while paying for qualified education expenses, there is a new alternative for the remaining funds.  Beginning in 2024, taxpayers can begin to “take a tax-free distribution in the form of a Roth Conversion” and the remaining 529 funds be moved to the Roth as a trustee-to-trustee transfer. The 529 owner can’t take a distribution from the account and then subsequently contribute that money to a Roth IRA for the 529 beneficiary.

Prior to the coming rule change, withdrawals made from the 529 plan not used for qualified education expenses resulted in taxpayers being assessed income taxes plus a 10% penalty on the earnings portion of the distribution from the plan.

This new law change comes with a few requirements that taxpayers need to be aware of.

  1. There is a $35,000 lifetime cap on the total amount of transfers.
  2. The beneficiary’s 529 plan must have been open for at least 15 years
  3. 529 plan contributions (and associated earnings) made in the prior five years are not eligible to be rolled over.
  4. Each year the maximum allowed transfer from the 529 plan to a Roth IRA is capped at the annual Roth IRA contribution limit and subject to Roth contribution rules such as meeting the earned income requirement and the phase-out for higher income earners.
  5. The transfer must be to the beneficiary’s Roth IRA and not to the parent’s Roth IRA.

With proper planning and familiarity with these qualifying rules, this new taxpayer friendly rule will allow the accumulated earnings on unused 529 plans to continue to grow tax-free for your child or other beneficiary within a Roth IRA over his or her lifetime.