Tax Connections Newsletter – February 2012
Frank L. Washelesky
Business Travel Away from “Home”- What’s Deductible?
It’s not uncommon for employees to be given temporary job assignments that require them to be out of town for an extended period. In this situation, certain living costs may be deductible.
Your “Tax Home”
If you’re an employee, your “home” for travel expense purposes is the location of your principal place of business – basically, where you normally work. If you’re temporarily away from home on business, you may deduct all unreimbursed ordinary and necessary business expenses (subject to the 2%-of-adjusted-gross-income floor) incurred while traveling, including meals and lodging. (Generally, one-half of meal costs are deductible.) Incidental living expenses, as well as the costs of trips home, are also potentially deductible.
Length of Assignment Is Pivotal
You won’t be able to deduct meals, lodging, or other personal living expenses if the assignment lasts more than one year – which is considered to be “indefinite.” Similarly, if you are employed at the new location on a permanent basis, it will become your new tax home. As a result, living expenses incurred at the new location will represent nondeductible personal expenses.
If your employer reimburses you for your travel expenses under an arrangement that qualifies as an “accountable plan,” the reimbursements won’t be taxable to you. But, in that case, you won’t be entitled to claim a deduction for the expenses.
Be careful to meet the federal tax law’s strict substantiation requirements. In short, keep all receipts and maintain a logbook relating to your business travel. Also, keep records in the event you need to prove to the IRS that it was reasonable for you to expect that your job assignment would last one year or less.
Charities and Politics – Not a Good Mix
When it comes to politics, charitable and educational organizations should proceed with caution. If an organization violates the IRS’s rules on participating in political campaigns, it could lose its tax-exempt status.
Political Campaign Activity
Nonprofit organizations are prohibited from participating or intervening in any political campaign activity that favors or opposes a candidate for public office. The rule applies to charities, educational institutions, churches/religious organizations, and other groups that are exempt from tax under Section 501(c)(3) of the tax code.
The rule is designed to prevent organizations from using tax-deductible contributions from the public for political campaign activities. Prohibited activities include:
- Engaging in fundraising,
- Making campaign donations,
- Distributing statements, and
- candidates (even if the rating is on the basis of nonpartisan criteria).
Not all forms of political activity are prohibited. Debates and forums are allowable educational activities, as long as the sponsoring charity shows no preference for or against a certain candidate.
Nonpartisan voter guides also may be distributed by organizations. However, voter guides may be closely scrutinized by the IRS, which examines not only their content but also checks if the pictures and size of type are presented in a non-biased manner.
Both political and charitable organizations use the Internet to communicate information to the public. To distribute that information to as many people as possible, organizations often link their sites to other sites. This could be a potential problem for charitable organizations since the IRS could view a link on a charity’s website to a political candidate or organization as an implied endorsement.
The IRS will treat information posted on an organization’s website that favors or opposes a candidate the same as if the organization had distributed printed material, oral statements, or broadcasts that favor or oppose a candidate. Organizations should carefully monitor their website postings and links to avoid any violations of the campaign restrictions.
Choosing a College Savings Vehicle
Where should families put the money they’re saving for college? A 529 college savings plan? A Coverdell education savings account (ESA)? A standard brokerage account in the parents’ names? Or maybe a custodial account for the student-to-be? Each option has pros and cons. Here’s a look at important factors that may influence the choice of a college savings vehicle.
Both Section 529 plans and ESAs offer federal income-tax advantages. Although contributions to either type of account are nondeductible, any investment earnings accumulate on a tax-deferred basis. Withdrawals for the beneficiary’s qualified education expenses are tax-free, meaning the investment earnings escape income tax altogether. If money is withdrawn for other purposes, income taxes and a 10% penalty are imposed (on previously untaxed earnings).
How are 529 plans and ESAs different tax-wise? For one, ESA contributions for a beneficiary are subject to a maximum annual dollar limit ($2,000 for 2012; scheduled to drop to $500 for 2013 and later years). In contrast, the federal tax law doesn’t restrict annual 529 plan contributions. And plan-imposed contribution limits tend to be quite generous.
Higher-income taxpayers face further restrictions on the ESA contributions they can make. The allowable ESA contribution is phased out as modified adjusted gross income rises from $95,000 to $110,000 (or from $190,000 to $220,000 for married taxpayers filing jointly). If income exceeds the top of the range, no ESA contribution is permitted that year. There aren’t any income restrictions on 529 plan contributions.
The tax treatment of custodial accounts established under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) is different. Investment earnings are taxed annually to the child, generally at the parents’ higher income-tax rate because of the tax law’s “kiddie tax” rules. Choosing growth-oriented investments, such as stocks, that don’t regularly pay dividends or interest can help counter this unfavorable tax treatment.
A custodial account has another potential drawback: The child assumes control of the funds at age 21 or 18, depending on state law. This isn’t the case with a 529 college savings plan owned by the parents. Parents may change the beneficiary to another family member without adverse tax consequences or close the account (and pay applicable taxes and penalties). With an ESA, the beneficiary assumes control of the account at age 21 (or 18). To maintain tax advantages, all ESA assets must be distributed by age 30. Parents who don’t want to give up any degree of control over their assets may prefer to use a standard brokerage account to accumulate savings they’ve earmarked for college.
Of all the alternatives discussed here, a 529 plan may offer the most limited investment options. 529 plans typically offer a menu of investment options and restrict the number of times investment changes may be made. Since investment options vary from plan to plan, potential investors should do their homework carefully before committing to a particular state’s 529 plan.
Financial Aid Impact
How college savings are held may affect a child’s ability to qualify for need-based financial aid. The federal financial aid formula considers both parental and student assets, but student assets count more heavily as resources available for college expenses. 529 plan accounts and ESAs held in either the parents’ or the student’s name are considered parental assets. UGMA/UTMA accounts are student assets.
The general information in this publication is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties.
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