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how-do-auditors-evaluate-accounting-estimates

How Do Auditors Evaluate Accounting Estimates? 
How Do Auditors Evaluate Accounting Estimates?  1600 942 smolinlupinco

When businesses report their finances, they often use accounting estimates determined by management. For example:  

  • Allowance for doubtful accounts
  • Warranty obligations
  • Costs of pending litigation
  • Goodwill impairment
  • Fair values of acquired intangible assets

When auditors evaluate the amounts reported on these financial statements, how do they determine whether those amounts are reasonable? 

Methods used to evaluate accounting estimates

As part of their standard audit procedures, external auditors evaluate accounting estimates. These accounting estimates can be based on a combination of subjective and objective information, resulting in measurement uncertainty. 

Methods include: 

Inquiry

Auditors may inquire about underlying assumptions, or inputs, that were used for making estimates. They will use the information from these inquiries to determine whether the inputs seem complete, accurate, and relevant. 


Estimates based on objective inputs (i.e., published interest rates or percentages from previous reporting periods) are typically less susceptible to bias than estimates based on speculative, unobservable inputs—particularly if management does not have prior experience with similar estimates. 

Testing 

If and when it’s possible, auditors may try to recreate estimates determined by management by using the same inputs, or even their own. If the auditor’s estimate is significantly different from the estimate on the financial statement, they will ask management for an explanation. In cases involving complex items, an independent specialist may also be called in.

Auditors may also compare previous estimates to what occurred after the date of the financial statement, as the outcome of an estimate tends to differ from management’s initial estimate due to errors, unforeseeable circumstances, and/or management bias. 

While estimates that are consistently aligned with what happened later add credibility, those with significant differences may cause an auditor to become more skeptical of management’s current estimates, often necessitating additional audits. 

Updates to auditing processes

In 2018, the Public Company Accounting Oversight Board (PCAOB) published revisions to the requirements for auditing accounting estimates and using specialists (often to support accounting estimates made by management) in audits. 

These revisions were published in: 

Release No. 2018-005

Release No. 2018-005, Auditing Accounting Estimates, Including Fair Value Measurements, is a risk-based standard emphasizing the importance of professional skepticism and the attention to potential management bias among auditors when evaluating estimates made by management. 

Per the updated standard, auditors should consider both corroborating and contradictory evidence obtained during the audit. 

Release No. 2018-006 

Release No. 2018-006, Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists, extends the auditor’s responsibility for evaluating specialists, requiring them to do more than simply obtain an understanding of their work. They must also perform procedures assessing the appropriateness of the company’s data, along with the assumptions and methods used. 

December 2022 analysis report

The PCAOB published a post-implementation review of these updates in December 2022. According to Interim Analysis Report: Evidence on the Initial Impact of New Requirements for Auditing Accounting Estimates and the Auditor’s Use of the Work of Specialists, approximately 33% of surveyed audit firms reported that the new requirements improved auditing practices. Other firms reported that the effects were limited, with no significant consequences on the audit process fees or hours. 

While the newer, more consistent guidance pertains to public companies, these effects filter down to private entity audits that use accounting estimates or depend on specialists. 

Accounting gray areas? Smolin can help. 

Because they involve a high level of subjectivity and judgment, accounting estimates and fair value measurements may be susceptible to misstatement. It can be particularly challenging to predict metrics that determine these accounting estimates. As a result, more auditor focus is required today than in previous, more stable accounting periods.  

It’s critical that you’re prepared to provide comprehensive documentation to support your estimates during the upcoming audit season. Need some assistance? Contact us to work with a knowledgeable accounting professional. 

5-reasons-to-outsource-your-accounting-needs

5 Reasons to Outsource Your Accounting Needs
5 Reasons to Outsource Your Accounting Needs 1600 941 smolinlupinco

CPA firms don’t just do audits and tax returns. They’re also available to help with your everyday accounting needs, from advisory services to payroll and sales tax filing. 

Is it time for your business to outsource its accounting needs? Here are five reasons you should hire a CPA. 

1. Professional insights

When you outsource your accounting to a knowledgeable CPA, you gain access to professional tax, legal, and financial advice. This helps your business remain compliant with rules and regulations while also avoiding costly errors resulting from misunderstanding complex policies. 

An accounting firm will offer you a second set of eyes, giving you the peace of mind that your company’s books accurately reflect your company’s performance. A CPA can also help streamline your accounting processes and assist you with accurately recording complex financial transactions. 

2. Scalable services

Your financial situation is bound to evolve, and a CPA will allow you to scale services up or down as needed. 

If you’re a start-up business, you won’t need to worry about outgrowing your bookkeeper or training them to take on more advanced accounting and tax tasks. And if you take on a major project—a new product launch or a merger with a strategic buyer, for example—your CPA has the knowledge and experience to guide you toward the best possible financial outcome. 

Additionally, if you unexpectedly lose your CFO, outsourcing can be a helpful temporary fix while you look for a suitable replacement (especially in today’s tight labor market). 

3. Cost-efficiency

By outsourcing to a CPA, you can save money on payroll taxes and insurance costs related to hiring an in-house accountant. Additionally, thanks to economies of scale with software purchases and usage, CPAs can likely provide some accounting service at a more affordable rate than your firm can on its own or with independent service providers. 

4. Convenience

When you delegate your accounting needs to a CPA, your team is freed up for other tasks such as marketing, product development, and more. Outsourcing will also free up resources for higher-value tasks—such as negotiating with prospects or focusing on client relationships—that can increase cash flow and optimize your organization’s efficiency. 

5. Confidence

When you involve a knowledgeable accounting professional in your business, you gain confidence with stakeholders if you plan to borrow money or solicit investment capital. 

When you hire a CPA, you also demonstrate that your business is committed to keeping accurate records and accessing the professional knowledge needed to handle complex matters. 

Outsource your accounting needs to Smolin

Could you benefit from outsourcing your daily accounting tasks? Whether you’re looking for a temporary or permanent CPA, we can offer a cost-effective service plan that works with—and adapts to—your current and future business needs. Contact us to get started. 

answers-to-your-tax-season-faqs

Answers to Your Tax Season FAQs
Answers to Your Tax Season FAQs 1600 942 smolinlupinco

On January 23, the IRS opened the 2023 individual income tax return filing season for accepting and processing returns for the 2022 tax year. 

If you typically file closer to the mid-April deadline (or if you file for an extension), you may want to consider filing your taxes earlier this year. And it’s not just about getting a head start on meeting deadlines—filing early can also protect you from tax identity theft. 

Here’s what you need to know about filing your taxes this year. 

How does tax identity theft work? 

A tax identity theft scam typically involves a thief using another person’s personal information to file a fraudulent tax return early in the season to claim a substantial refund. The actual taxpayer will not discover the identity theft until, after filing their own taxes, the return is rejected by the IRS because the same Social Security number has already been used to file taxes that year. 

While the taxpayer should ultimately be able to prove the legitimacy of their return, the process can be frustrating, time-consuming, and potentially delay a refund. 

The best way to protect against having your tax identity stolen? Filing early. If you file first, the IRS will reject the fraudulent tax return. 

What are the deadlines for this year? 

While the tax filing deadline is typically April 15 of each year, the deadline for most taxpayers this year is Tuesday, April 18, 2023. This is because April 15 falls on a weekend, and the District of Columbia’s Emancipation Day holiday falls on Monday, April 17. 

Those requesting an extension will have until October 16, 2023, to file their taxes. Note that the extension to file a return does not grant an extension to pay taxes. You should still estimate and pay any taxes owed by the regular deadline to avoid penalties. 

When will I receive my tax documents? 

Before filing your tax return, you will need to receive all your Form W-2s and 1099s. The deadline for employers to issue 2022 W-2s and for businesses to issue 2022 1099s is January 31. 

If you have not received your W-2 or 1099 by February 1, you should contact the entity that should have issued it. If that doesn’t help, contact a professional tax advisor to determine how to proceed. 

Should I file early? 

In addition to protecting yourself from tax identity theft, early filing has advantages. The sooner you file your taxes, the sooner you will receive a refund. The IRS anticipates that most refunds will be issued within 21 days, with this time potentially being shorter if you file electronically and receive your refund via direct deposit. 

Another advantage of direct deposit is that it reduces the chances of a refund check getting lost, stolen, stuck in postal delays, or returned to the IRS as undeliverable. 

Plan ahead for your taxes with us

Getting ahead of your taxes can be complicated, so it’s best to consult with a professional to ensure you have everything in place for a successful tax filing. Contact us to work with an experienced tax professional for your 2022 taxes.

lifetime-gifts-vs-bequests-at-death-which-option-is-right-for-you

Lifetime Gifts vs. Bequests at Death: Which Option is Right For You?
Lifetime Gifts vs. Bequests at Death: Which Option is Right For You? 1600 941 smolinlupinco

One of the primary goals of estate planning is to pass along as much of your wealth and assets as possible to your family, which involves protecting your estate from gift and estate taxes. One way to do this is by giving gifts during your lifetime. 

Considering the inflation-adjusted $12.92 million gift and estate tax exemption, lifetime gifts are an appealing option for many. But they’re not the right choice for everyone. Depending on your unique situation, you may find that there are tax advantages to keeping assets in your estate during your lifetime and making bequests at death. 

Gifts vs. bequests: understanding the tax implications

Lifetime gifts 

When you make lifetime gifts and remove assets from your estate, you are protecting future appreciation from estate tax. However, the recipient will receive a “carryover” tax basis, meaning they assume your basis in the asset. 

If a gifted asset has a low basis compared to its fair market value (FMV), a sale will trigger capital gains taxes based on the difference. 

Bequests at death

When you transfer assets at death, the recipient can sell them with little or no capital gains tax liability. Those assets currently receive a “stepped-up basis” equal to their date-of-death FMV. 

Which strategy has the lower tax cost? 

Which is the better option—transferring an asset by gift now or by bequest later? That depends on a few factors, including: 

  • The asset’s basis-to-FMV ratio
  • The likelihood that its value will continue to appreciate
  • Your exposure to gift and estate taxes, now or in the future 
  • How long you expect the recipient to hold the asset after receiving it 

Navigating uncertainty with future estate tax law

It can be difficult to choose the right time to transfer wealth, especially because there are many unknowns as to what will happen to the gift and estate tax regime down the road—for example, without further legislation from Congress, the base gift and estate tax exemption will return to inflation-adjusted $5 million in 2026. 

The good news is that with carefully designed trusts, you can reduce the impact of this uncertainty. 

If the tax exemption decreases

If you believe the gift and estate tax exemption will be reduced, you can take advantage of the current exemption by transferring appreciated assets to an irrevocable trust. This will help you avoid gift tax and protect future appreciation from estate tax. 

As a result, your beneficiaries will receive a carryover basis in the assets. If and when they sell them, they will be subject to capital gains taxes. 

If the tax exemption stays the same or increases

If the gift and estate tax exemption stay the same or increases, a trust gives the trustee certain powers that, when exercised, will include the assets in your estate. 

Your beneficiaries will then receive a stepped-up basis, with the higher exemption shielding all or most of the assets’ appreciation from estate taxes. 

Find the right strategy with Smolin

If you haven’t yet decided between lifetime gifts or bequests at death, it’s helpful to work with a professional to monitor legislative developments so you can update your estate plan accordingly. 

At Smolin, our CPAs can work with you to find the right strategy for your situation. Contact us to get started today. 

5-tax-saving-ways-to-pay-for-your-childs-college-education

5 Tax-Saving Ways to Pay for Your Child’s College Education
5 Tax-Saving Ways to Pay for Your Child’s College Education 1600 942 smolinlupinco

Do you have a child or grandchild currently attending college? Congratulations! 

To help cover the costs of post-secondary education, you may have saved up over the course of several years in a tax-favored account, such as a 529 plan. Once your child is enrolled in college, though, you may be able to claim a number of tax breaks. 

For example: 

1. Tuition tax credits

The American Opportunity Tax Credit (AOTC) can be taken up to $2,500 per student for the first four years of college. This includes a 100% credit for the first $2,000 and a 25% credit for the second $2,000 in tuition, fees, and books. This credit is 40% refundable up to $1,000, which means you can get a refund if the credit amount is higher than your tax liability. 

You can also take the Lifetime Learning Credit (LLC) of up to $2,000 per family for each additional year of post-secondary education, which includes a 20% credit for up to $10,000 in tuition and fees. 

That said, only one education tax credit can be claimed per eligible student per year. To claim the credit, the taxpayer must receive a Form 1098-T statement from the school. 

Note that both credits will be phased out for those with certain modified adjusted gross income (MAGI): 

  • Between $160,000 and $180,000 for married couples filing jointly
  • Between $80,000 and $90,000 for singles

2. Scholarships

If certain conditions are met, scholarships can be exempt from income tax. One of these conditions is that the scholarship cannot be compensation for services and must instead be used for tuition, fees, books, and supplies—not for room and board.

Remember that a tax-free scholarship will reduce the expenses considered when computing the AOTC and LLC. As a result, those credits may be reduced or eliminated. 

3. Employer assistance

If your child’s college expenses are covered by your employer, that payment is considered a fringe benefit and is taxable to you as compensation. 

If it’s part of a scholarship program outside of the pattern of employment, however, it will be treated as a scholarship—assuming the scholarship requirements are met. 

4. Tax-exempt gifts

When someone gifts you money to cover your child’s college expenses, that person is generally subject to gift tax. For 2023, the gift tax exclusion threshold is $17,000 per recipient; married donors who give combined gifts may exclude gifts of up to $34,000. 

However, if someone—such as a grandparent—submits your child’s tuition payments directly to the educational institution, there is an unlimited gift tax exclusion. This applies only to direct tuition costs (as opposed to room and board, books, supplies, and more). 

5. Retirement account withdrawals

You can withdraw money from your IRA or Roth IRA account at any time without incurring the 10% early withdrawal penalty, as long as those withdrawals are used to pay for college costs. Note, however, that the distributions are subject to tax under the usual rules. 

You may also have the option to withdraw from or borrow against your employer retirement plan—but before doing so, ensure you fully understand any and all tax implications, including any potential penalties. 

Plan ahead with Smolin

Not all of the above-mentioned tax breaks can be used in the same year, and some may also impact qualification amounts for other tax breaks. 

Not sure which option is best for your situation? Our CPAs can help. Contact us if you would like to discuss any of these options, or other alternatives that may apply to your situation. 

secure-2-0-helps-you-save-for-retirement

SECURE 2.0 Helps You Save for Retirement
SECURE 2.0 Helps You Save for Retirement 1488 875 smolinlupinco

Built on the original SECURE Act of 2019, the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0) was signed into law on December 29, 2022. 

The SECURE Act of 2019 made major changes to retirement provisions, including the required minimum distribution (RMB) rules. Here are some additional changes you should be aware of with SECURE 2.0. 

Increased age for beginning RMDs 

Employer-sponsored qualified retirement plans, traditional IRAs, and individual retirement annuities are all subject to RMB rules, which require that distribution begins by a specified start date. 

Under the SECURE 2.0 law, as of January 1, 2023, the start date will increase from age 72 to age 73. On January 1, 2033, this will increase to age 75. 

Higher “catch-up” contributions

Currently, participants in certain retirement plans are able to make additional catch-up contributions once they reach age 50 or older, with a limit on catch-up contributions to 401(k) plans of $7,500 for 2023. 

With SECURE 2.0, this limit is increased for individuals between the ages of 60 and 63 to $10,000 or 150% of the regular catch-up amount, whichever is greater. The provision will be effective for taxable years beginning January 1, 2025 (along with increased catch-up amounts for SIMPLE plans). 

After 2025, the increased amounts will be indexed for inflation.

Allowance of tax-free rollovers

With SECURE 2.0, beneficiaries of 529 college savings accounts will be permitted to make direct trustee-to-trustee rollover contributions from a 529 account to a Roth IRA in their names, without tax or penalty. 

This provision is effective for distributions after December 31, 2023, and several rules still apply. 

“Matching” contributions for employees with student loan debt

SECURE 2.0 will allow employers to make matching contributions to 401(k) and certain other retirement plans for qualified student loan payments. As a result, employees who are repaying student loan debt and cannot afford to save for retirement can still receive matching contributions from employers in their retirement plans. 

This will be effective beginning January 1, 2024. 

Changes to ABLE accounts

There are also changes to non-retirement plan provisions, including a change to tax-exempt Achieving a Better Life Experience (ABLE) accounts, which are designed to assist individuals with disabilities. 

Currently, ABLE account beneficiaries must have experienced a disability or blindness before age 26. With SECURE 2.0. This age limit is increased to 46, making more people eligible for ABLE account benefits. 

This is effective for tax years beginning after December 31, 2025. 

Questions? Contact us

These are only some of the many changes brought about by SECURE 2.0. If you have any questions about how the new law will affect you, contact us.

the-standard-business-mileage-rate-is-increasing

The Standard Business Mileage Rate is Increasing 
The Standard Business Mileage Rate is Increasing  1600 941 smolinlupinco

National gas prices are lower than they were a year ago, but the optional standard mileage rate used for calculating deductible costs of business vehicles will be higher in 2023. 

The IRS recently announced a cents-per-mile rate of 65.6 for the business use of an automobile, which applies to electric and hybrid-electric vehicles, as well as gasoline and diesel-powered vehicles. 

This comes after 2022’s rate of 58.5 cents per mile for the first half of the year (January 1-June 30), and 62.5 cents per mile for the second half (July 1-December 31). 

How business cents-per-mile rates are calculated 

This increase comes as somewhat of a surprise, given the fact that gas prices are lower than they have been in previous years—$3.15 per gallon of regular gas on December 29, 2022, compared to $3.52 one month earlier, and $3.28 one year earlier (according to AAA Gas Prices). 

The business cents-per-mile rate is adjusted annually based on a yearly study by the IRS. In some cases, if there is a significant shift in gas prices, the IRS will change the cents-per-mile rate partway through the year (as seen in 2022). 

Note, however, that the standard mileage rate isn’t just calculated based on the price of gas. It is based on all of the costs involved in driving a vehicle, including gas, maintenance, repair, and depreciation. 

Standard rate compared to actual expenses

Generally speaking, businesses can deduct the actual expenses attributed to business use of vehicles, including: 

  • Gas
  • Oil
  • Tires
  • Insurance
  • Repairs
  • Licenses
  • Vehicle registration fees 

Additionally, you can claim a depreciation allowance for vehicles that are not subject to certain depreciation write-off limits that don’t apply to other types of business assets. 

The cents-per-mile rate is particularly beneficial for those who don’t want to keep track of and account for all vehicle-related expenses. However, you must still record information such as business trip mileage, dates, and destinations. 

This rate is popular among businesses that attract, retain, and reimburse employees who use their own personal vehicles for business purposes. This is because, under current law, employees cannot deduct unreimbursed business expenses—such as business mileage—on their tax returns. 

Those that use the cents-per-mile rate must comply with all applicable rules. Otherwise, those reimbursements could be considered taxable wages to employees. 

When you can’t use the standard rate

Note that there are some instances in which the standard cents-per-mile rate cannot be used. This can depend on how you’ve claimed previous deductions for the same vehicle, whether the vehicle is new to your business this year, or whether you want to capitalize on certain first-year depreciation tax breaks. 

Not sure whether to use the standard mileage rate? Our team can help

There are many factors to consider when choosing whether to use the standard mileage rate to deduct business-related vehicle expenses. 

If you have questions about how to track and claim these expenses, our team of professionals can help. Contact us to get started. 

single-parent-estate-planning-what-you-need-to-know

Single Parent Estate Planning: What You Need to Know
Single Parent Estate Planning: What You Need to Know 1600 941 smolinlupinco

According to the Pew Research Center, nearly 23% of children in the United States live with only one parent—more than three times the number of children from around the world. 

Estate planning for single parents is similar to estate planning for households with two parents in many ways, as they both involve providing for children’s care and financial needs down the road. When there is only one parent involved, though, certain aspects of the estate plan require additional foresight. 

If you live in a single-parent household, here are some things you will need to address in your estate plan. 

Guardianship

If you become incapacitated or pass away unexpectedly, your children will need an appropriate guardian. In the event that the other parent is unwilling or unable to take custody, does your estate plan identify a suitable, willing guardian for your children? 

Additionally, will that guardian need financial assistance in caring for your children and providing for their education? Depending on your circumstances, you may want to consider keeping your wealth in a trust until your children reach a certain age. 

Trust planning

Trust planning is one of the most effective ways to ensure your children are cared for financially. With a trust, you can specify when and under what circumstances the funds should be distributed to your children. In the meantime, you can designate a qualified, trusted individual or corporate trustee who can manage those trust assets. 

This is particularly important if your children are minors—without a trust, your assets may end up being controlled by a former spouse or court-appointed administrator. 

Incapacitation 

As a parent, your estate plan should include a living will, advance directive, or health care power of attorney. As a single parent, this is essential, as these documents allow you to confirm your health care preferences and designate someone to make medical decisions on your behalf, should you become incapacitated. 

It’s also a good idea to have a revocable living trust or durable power of attorney who will manage your finances if you cannot do so. 

Need to revise your estate plan?

If you’re a single parent, it’s critical to have an up-to-date estate plan in place. Our financial advisors are happy to help you review and revise your estate plan. Contact us to get started today.

roche-miseo-barchetto-joins-smolin-lupin

Roche Miseo Barchetto Joins Smolin Lupin 
Roche Miseo Barchetto Joins Smolin Lupin  1600 1067 smolinlupinco

FAIRFIELD, NJ – January 19, 2023 – Smolin Lupin, an Independent Member of the BDO Alliance USA and one of the NJBIZ Top 20 Public Accounting Firms in New Jersey, is pleased to announce the merger of Roche Miseo Barchetto, LLC, a CPA firm headquartered in Parsippany, New Jersey. 

The professional team from Roche Miseo Barchetto, LLC services clients throughout the tri-state area. With a specialty in accounting for contractors spanning over 35 years, the firm has built a strong reputation in the surety and banking community. RMB also services wholesale distributors, professional service entities, and real estate professionals.

“We are thrilled to have RMB join us in providing the quality accounting and consulting services Smolin has always been known for,” said Ted Dudek, CPA and Managing Member of the Firm. “We believe Smolin will benefit greatly from RMB’s accounting and tax experience and commitment to quality and timely service.”

This merger will expand Smolin’s ability to deliver industry-leading financial and accounting solutions throughout New Jersey. RMB’s unique specialty in accounting for contractors will enhance Smolin’s existing client base in the construction industry.

“Our merger with Smolin will allow us to expand our client services and provide the necessary specialization in an ever-expanding marketplace of accounting and tax services,” said Carmen Miseo, CPA. “The cultural synergies between the two companies are apparent, as we share the same vision and philosophies. We look forward to continuing to service our clients in the same manner that you have grown accustomed to.”

As part of this merger, the RMB staff will relocate to Smolin’s Fairfield, New Jersey offices.

About Smolin Lupin

Since 1947, Smolin has been committed to providing industry-leading professional financial and accounting services uniquely designed to meet the needs of each and every client. Smolin’s attention to the needs of each client has helped them become the successful and respected CPA firm they are today. Smolin Lupin is an Independent Member of the BDO Alliance USA and one of the NJBIZ Top 20 Public Accounting Firms in New Jersey.

About Roche Miseo Barchetto, LLC

In 1987 Carmen Miseo and Richard Roche founded Roche Miseo & Co. and gave rise to what is now known as Roche Miseo Barchetto, LLC. Christopher Barchetto joined the firm in 1998 and became a partner in 2006. Today the firm thrives, servicing clients throughout the tri-state area. RMB’s commitment to quality and timely service is the driving force behind the firm’s growth over the years.

save-for-your-childrens-college-education-the-tax-wise-way

Save for Your Children’s College Education the Tax-Wise Way
Save for Your Children’s College Education the Tax-Wise Way 1600 941 smolinlupinco

If you have children, you’ve likely got college savings on your mind. Here are some tax-favored ways to save for future education costs so that you can take advantage of your options. 

Savings bonds

When used to finance college expenses, Series EE U.S. savings bonds offer two tax-saving benefits: 

  1. Until the bonds are cashed in, you don’t have to report interest on them for federal tax purposes. 
  2. If the bond proceeds are put toward qualified college expenses, interest on qualified Series EE and Series I bonds may be exempt from federal tax. 

To qualify for the college tax exemption, bonds must be purchased in your name or jointly with your spouse—not in your child’s name. Additionally, proceeds must be used for education-related expenses only (i.e., tuition and fees but not room and board). If only some of the proceeds are used for qualified expenses, then only some interest will be exempt. 

Note that if your modified adjusted gross income (MAGI) exceeds certain thresholds, the exemption will be phased out. For example, the exemption for bonds cashed in 2023 begins to phase out when MAGI hits $137,800 for married joint filers (or $91,850 for other returns). The exemption is completely phased out when MAGI is at or above $167,800 (or $106,850 for others).

529 plans

Qualified tuition programs, or 529 plans, are established by state governments or private institutions. These programs allow you to purchase tuition credits or contribute to an account specifically designed for your child’s future education costs. 

These contributions are not deductible and are calculated as taxable gifts to the child. They are, however, eligible for the 2023 annual gift tax exclusion of $17,000. Donors who contribute more than the annual exclusion limit for the year may treat the gift as if it were given in increments throughout a five-year period. 

Until college costs are paid from the funds, earnings on these contributions accumulate tax-free. Distributions from 529 plans are also tax-free to the extent that the funds are used to pay for qualified higher education expenses, including up to $10,000 in tuition costs for elementary or secondary school. 

Distributions of earnings not used for qualified higher education expenses will generally be subject to income tax in addition to a 10% penalty. 

ESAs 

For each child under the age of 18, you can establish a Coverdell education savings account (ESA) and make contributions of $2,000. Note that this age limit does not apply to beneficiaries who have special needs. 

Once AGI is above $190,000 on a joint return ($95,000 for others), the right to make contributions will begin to phase out. If the income limit becomes an issue, the child can then contribute to their own account. 

Despite contributions not being deductible, income in the account is not taxed and distributions are tax-free when put toward qualified education expenses. If the child does not pursue higher education, the money must be withdrawn when they turn 30, and any earnings will be subject to tax plus penalty. However, those unused funds can be transferred to another family member’s ESA if they have not yet reached age 30. (This age requirement does not apply to those with special needs.)  

Talk to a financial advisor today

This is not an exhaustive list of all the tax-wise ways to save for your children’s college education. If you would like to discuss these options or learn about others available, contact us to speak with a certified CPA. 

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