Sunday, May 31, 2009
The IRS will allow a change in investment strategy twice in 2009. This is good news for 529 plan participants, especially those who may otherwise be locked into a mix of investments that has turned out to be more speculative than initially contemplated.
A 529 plan is a type of qualified tuition program. In a 529 plan, taxpayers contribute to an account established for paying a student’s educational expenses. Eligible educational expenses include the costs of tuition, books, and fees at eligible institutions, such as colleges, vocational schools, and other postsecondary institutions.
Contributions to 529 plans are not tax-deductible. However, earnings are tax-free, and distributions used to pay the beneficiary’s qualified education expenses are tax-free.
A 529 plan should not be confused with a Coverdell Educational Savings Account (Coverdell ESA). The latter is also a savings account for education expenses that offers tax-free distributions. Funds saved in a Coverdell ESA can be used for elementary and secondary school
expenses as well as college costs.
Generally, participants in 529 plans must select only from among broadbased investment strategies designed exclusively by the program. Additionally, the IRS has traditionally permitted a change in investment strategy only once a year.
In response to the economic slowdown and the turmoil in the financial markets, the IRS will allow investments in a 529 plan to be changed during 2009 on a more frequent basis. A 529 plan will not violate the investment restriction if it permits a change in the investment strategy twice in calendar year 2009, as well as upon a change in the designated beneficiary of the account.
If you have any questions about 529 plans, or other tax incentives for education, please contact Doeren Mayhew at (248) 244-3000.
Tuesday, May 5, 2009
Now that the end of the traditional tax filing season is upon us, it may be tempting to purge certain tax documents from your files for the current and past tax years. However, you should be aware of the rules for retaining relevant tax records in the event that the IRS – or another taxing authority – requires that those records be produced as part of an audit.
Keep at Least Three Years
The following records are commonly used to substantiate a taxpayer’s income and expense items:
- Form(s) W-2
- Form(s) 1099
- Form(s) K-1
- Bank and brokerage statements
- Canceled checks or other proof of payment of deductible expenses
At a minimum, the above tax records should be kept for a three-year period following the date that you filed your return, or its due date, if later.
However, the IRS’s time limit for initiating an audit on a return where income was grossly understated, yet no fraud was discovered, is six years. Therefore, it is ideal to retain the above documents for six years to better protect yourself in the event of an audit.
Similarly, you should keep investment records for a period of time after you liquidate any given investment. Documentation that substantiates the gain or loss on an investment should be kept for a period of time that corresponds with the time frame that you retain other tax documents supporting the return on which you report the sale.
Prior Years’ Tax Returns
It is a good idea to maintain one or more permanent files with important legal and personal documents, including those relating to taxes. Specifically, as a general rule, you should retain copies of your federal and state income-tax returns (and any tax payments) indefinitely. For instance, the IRS or another taxing authority could claim that you never filed a particular year’s return. If that occurs, the IRS (or other authority) could assess tax and penalties relating to the return in question. You will need a copy of your return to bolster your position that you actually filed the return.
Need More Information?
Filing your returns on a timely basis is just one aspect of properly handling your taxes. Be prepared to defend yourself in the event of an audit by retaining your records for the appropriate time period. Call the professionals at Doeren Mayhew today at (248) 244-3000 if you have any further questions.