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Tax Benefits for Grandparents

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Regarding grandparents, the fact that they are grandparents, does not, in and of itself result in any tax benefits.  However, there are certain tax provisions that may apply.  First, any amounts given by a grandparent is usually considered a gift.  Beginning in 2022, the annual exclusion increased from $15,000 to $16,000.  Gifts to one person in excess of the annual exclusion require the filing of a gift tax return, although no gift tax is incurred because the gift tax credit is so large. Married grandparents can join together to give one grandchild $32,000 each year.

Grandparents can establish a Section 529 plan for a grandchild and possibly save state income tax in the state where the grandparent resides, depending on state law.  Maryland and DC, for example, give the donor a deduction for money contributed to their state’s Sec 529 plan. A grandparent who is married can deposit $160,000 into their grandchild’s 529 plan to cover K-12 expenses—an amount equivalent to a $32,000 contribution each year over five years. When filling out their federal tax forms, they can elect to include this gift over a five-year period (i.e., $32,000 x 5 = $160,000), thereby excluding the $160,000 from any gift taxes.

Assuming the grandparents live five more years, the entire $160,000, plus the money earned from this investment, will not be taxed as part of their estate. And after this five-year period elapses, they can deposit an additional $160,000. Grandparents should be sure to consult their tax advisor before making large deposits into a 529 plan.

Here’s another opportunity.  At age 72, IRA owners must start taking money – known as Required Minimum Distributions (RMD) –  from their retirement accounts.  Even if the person doesn’t need the RMD money, IRS still requires the distribution which is taxable.

If the grandparent contributes their RMD to a grandchild’s 529 account, the grandparent will still pay income tax on the RMD, but the money they invest in the 529 account will grow tax-deferred. And if the money is later used for qualified education expenses, the entire amount is available to the student tax-free.  Additionally, the amount contributed by the grandparent to a 529 account is not included in their estate for estate tax purposes — even though they retain control over the funds.  When applying for financial aid for college, by setting up a 529 account in the name of the grandparent with a grandchild as a beneficiary, these assets are not included as either the child or parent’s assets.

Finally, a grandparent can pay for college tuition. A special tax-code exemption allows a grandparent to pay college tuition and not have that money subjected to gift tax. The IRS makes an exclusion in the case of financial gifts used for tuition payments.

The exclusion, called the Gift Tax Education Exclusion for Tuition, means that money gifted to a friend or family member to pay for college tuition is not subject to the federal gift tax. Under the Internal Revenue Code, you can pay unlimited amounts for someone’s tuition and not be taxed.

To make a tuition gift that qualifies for the federal gift tax educational exclusion, the gift-giver should make the tuition payment directly to the student’s school—they should not give the money to the student.

Paying the school directly, instead of donating to a student’s 529 plan helps grandparents avoid potential gift taxes if they plan to make significant contributions. Of course, it’s not just the grandparent’s finances that must be considered, but also the student’s. Luckily, that is about to get easier.

In the past, grandparents faced issues when trying to pay for their grandchildren’s college tuition. However, with the arrival of the new Free Application for Federal Student Aid (FAFSA), a major change is coming that will be very beneficial.

Those who file the FAFSA will no longer be asked if their grandparents will be providing any assistance. This means that students whose grandparents pay part of their college expenses will no longer see their financial aid decrease, as long as the grandparents know how to properly give the money.

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AMERICAN RESCUE PLAN ACT SUMMARY

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The following is a brief summary of key provisions included in the American Rescue Plan Act of 2021, signed into law March 11, 2021.
Unemployment Benefit Exclusion for 2020
Effective for 2020 only, the first $10,200 of unemployment compensation, per person, is excluded from taxable income if modified adjusted gross income is $150,000 or less.
Premium Tax Credit
Effective for 2020 only, any advance payment that exceeds the Premium Tax Credit allowed is disregarded and does not increase tax liability on the return. This suspension applies to all taxpayers regardless of income level as a percentage of the federal poverty
level.
Recovery Rebate and Round 3 Stimulus Payment
Eligible individuals may qualify for a 2021 rebate amount of up to $1,400 per taxpayer ($2,800 MFJ), plus $1,400 per dependent. This stimulus payment for dependents is not limited to dependents who are under age 17. The payment starts to phase out when AGI exceeds $75,000 (Single, MFS), $150,000 (MFJ, QW), and $112,500 (HOH) and is fully phased out at $80,000 (Single, MFS), $160,000 (MFJ, QW), and $120,000 (HOH).
Unemployment Benefits Extended
The enhanced $300 per week of Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation is extended to September 6, 2021.
Child Tax Credit
Effective for 2021 only, the Child Tax Credit (CTC):
• Is increased to $3,000 per qualifying child, • Is $3,600 in the case of a qualifying child age five or younger as of December 31, 2021,
• Age limitation is increased from age 16 to age 17, and
• Is fully refundable.
Phase-out. The increased CTC (over the $2,000 prior amount) phases out when modified AGI exceeds $75,000 (Single, MFS), $150,000 (MFJ, QW), and $112,500 (HOH). Once the increased CTC is phased-out, the $2,000 per qualifying child still applies until modified AGI reaches the previous thresholds.
Advance Payment of the Child Tax Credit
The IRS is instructed to establish a program for making periodic payments to taxpayers for the advance payment of the Child Tax Credit. The advance amount will be estimated by the IRS. The IRS will establish an on-line portal which allows taxpayers to elect not to
receive advance payments, or to update relevant information to calculate the advance payment. Advance payments will be made during the period July 1, 2021 through December 31, 2021.
Earned Income Credit
Effective for 2021 only, the Earned Income Credit for individuals without a qualifying child is expanded. The investment income limitation for 2021 is increased from $3,650 to $10,000 and indexed for inflation in future years. Effective for 2021 only, if earned income
for 2021 is less than 2019 earned income, the taxpayer may elect to used 2019 earned income when calculating the 2021 EIC.
Dependent Care Expense Credit
Effective for 2021 only, the Child and Dependent Care Expense Credit is refundable. The dollar limitation on expenses paid for a qualifying person is increased from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying persons. The maximum percentage of 35% is increased to 50% for AGI up to $125,000 with the credit percentage phasing out and reduced to zero when AGI reaches $438,000.
Dependent Care Assistance Program
Effective for 2021 only, the $5,000 maximum exclusion in increased to $10,500 ($5,250 MFS).
Student Loan Forgiveness Exclusion
For tax years 2021 through 2025, any discharge of student loan debt for any reason, including private student loans, may be excluded from taxable income, as long as there is no provision for the student to provide services to the discharging lender.
Payroll Tax Credits
The new law reinstates the $511/$200 per day 100% refundable payroll tax credit for employees who receive paid sick leave or paid family leave for reasons related to COVID-19. The new law also modifies the reasons for these payments.
Paid Sick Leave Credit. This credit is available for the period beginning on April 1, 2021 and ending on September 30, 2021.
Paid Family Leave Credit. The new law extends the period for this credit for the period beginning on April 1, 2021 and ending on September 30, 2021. This credit is limited to $12,000 in the aggregate for all calendar quarters, including the quarters prior to April 1, 2021.
Self-employed individuals. The self-employed qualified sick leave equivalent amounts and qualified family leave equivalent amounts are also extended for the same time periods.
Employee Retention Credit
The new law extends the Employee Retention Credit to wages paid after June 30, 2021 and before January 1, 2022 and generally follows the same rules that are in effect for the first half of 2021.
COBRA Coverage Assistance
The new law provides funding to help pay premiums for COBRA continuation coverage.
Paycheck Protection Program (PPP)
The new law appropriates additional funds for the PPP and makes some minor modifications.
SBA Loans and Grants
The new law includes provisions that excludes additional SBA grants from income.
Limitation on Excess Business Losses of Non-Corporate Taxpayers
The limitation on excess business losses is extended to tax years beginning before January 1, 2027.
Pensions
Financial assistance is provided to eligible underfunded multiemployer pension plans for plan years 2020 through 2022 Shortfall funding for single employer plans may be amortized over a longer time frame.

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The American Rescue Plan Act

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The IRS is reviewing implementation plans for the newly enacted American Rescue Plan Act of 2021. Additional information about a new round of Economic Impact Payments, the expanded Child Tax Credit, including advance payments of the Child Tax Credit, and other tax provisions will be made available as soon as possible on IRS.gov. The IRS strongly urges taxpayers to not file amended returns related to the new legislative provisions or take other unnecessary steps at this time.

The IRS will provide taxpayers with additional guidance on those provisions that could affect their 2020 tax return, including the retroactive provision that makes the first $10,200 of 2020 unemployment benefits nontaxable. For those who haven’t filed yet, the IRS will provide a worksheet for paper filers and work with software industry to update current tax software so that taxpayers can determine how to report their unemployment income on their 2020 tax return. For those who received unemployment benefits last year and have already filed their 2020 tax return, the IRS emphasizes they should not file an amended return at this time, until the IRS issues additional guidance.

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ALL TAXPAYERS NOW ELIGIBLE FOR IDENTITY PROTECTION PINS

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The IRS has expanded the Identity Protection PIN Opt-In Program to all taxpayers who can verify their identities. The Identity Protection PIN (IP PIN) is a six-digit code known only to the taxpayer and to the IRS. It helps prevent identity thieves from filing fraudulent tax returns using a taxpayers’ personally identifiable information. “This is a way to, in essence, lock your tax account, and the IP PIN serves as the key to opening that account,” said IRS Commissioner Chuck Rettig. “Electronic returns that do not contain the correct IP PIN will be rejected, and paper returns will go through additional scrutiny for fraud.”

The IRS launched the IP PIN program nearly a decade ago to protect confirmed identity theft victims from ongoing tax-related fraud. In recent years, the IRS expanded the program to specific states where taxpayers could voluntarily opt into the IP PIN program. Now, the voluntary program is going nationwide.

Taxpayers who want an IP PIN for 2021 should go to IRS.gov/IPPIN and use the Get an IP PIN tool. This online process will require taxpayers to verify their identities using the Secure Access authentication process if they do not already have an IRS account. See IRS.gov/SecureAccess for what information you need to be successful. There is no need to file a Form 14039, an Identity Theft Affidavit, to opt into the program.

Once taxpayers have authenticated their identities, their 2021 IP PIN immediately will be revealed to them. Once in the program, this PIN must be used when prompted by electronic tax returns or entered by hand near the signature line on paper tax returns. All taxpayers are encouraged to first use the online IP PIN tool to obtain their IP PIN. Taxpayers who cannot verify their identities online do have options.
Taxpayers whose adjusted gross income is $72,000 or less may complete Form 15227 PDF , Application for an Identity Protection Personal Identification Number, and mail or fax to the IRS. An IRS customer service representative will contact the taxpayer and verify their identities by phone. Taxpayers should have their prior year tax return at hand for the verification process.

Taxpayers who verify their identities through this process will have an IP PIN mailed to them the following tax year. This is for security reasons. Once in the program, the IP PIN will be mailed to these taxpayers each year. Taxpayers who cannot verify their identities online or by phone and who are ineligible for file Form 15227 can contact the IRS and make an appointment at a Taxpayer Assistance Center to verify their identities in person. Taxpayers should bring two forms of identification, including one government-issued picture identification. Taxpayers who verify their identities through the in-person process will have an IP PIN mailed to them within three
weeks. Once in the program, the IP PIN will be mailed to these taxpayers each year.

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New charitable deduction for taxpayers who don’t itemize

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Individuals who elect to take the standard deduction generally cannot claim a deduction for their charitable contributions. However, the CARES Act permits these individuals to claim a limited deduction on their 2020 federal income tax returns for cash contributions made to certain qualifying charitable organizations and still claim the standard deduction. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify.

Under this change, these individuals can claim an “above-the-line” deduction of up to $300 for cash contributions made to qualifying charities during 2020. The maximum above-the-line deduction is $150 for married individuals filing separate returns.

Though cash contributions to most charitable organizations qualify, those made either to supporting organizations or to establish or maintain a donor advised fund, do not. Cash contributions carried forward from prior years do not qualify, nor do most cash contributions to charitable remainder trusts. In general, a donor-advised fund is a fund or account in which a donor can, because of being a donor, advise the fund on how to distribute or invest amounts held in the fund. A supporting organization is a charity that carries out its exempt purposes by supporting other exempt organizations, usually other public charities. See Pub. 526 for more information on the types of organizations that qualify.

Cash contributions include those made by check, credit card or debit card as well as amounts incurred by an individual for unreimbursed out-of-pocket expenses in connection with the individual’s volunteer services to a qualifying charitable organization. Cash contributions don’t include the value of volunteer services, securities, household items or other property.

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