A recent IRS ruling now allows the wealthy to cut their tax bills by prepaying for a family member’s tuition.
This tactic addresses two societal issues: the soaring cost of education and the cost to transfer intergenerational wealth. The ruling enables boomers to share their wealth with loved ones while they are still alive and skirt hefty estate and gift taxes.
Under the current law, an individual can transfer up to $12,000 a year per person tax-free without having to report it to the IRS and without being subject to gift taxes. However, the limit does not apply if you are paying for someone’s education or medical expenses and the payments are going directly to the educational institute or medical service provider.
There are some risks to this multiyear approach of prepaying for tuition. The child could refuse to attend the chosen school, they could be expelled, drop out, or transfer to another school. The prepayments are in many cases nonrefundable, unless you make alternative arrangements with the institution. If you are considering prepaying, then inquire with the school about their prepayment policies.
Two other options are the 529 college savings plan and the Health and Education Exclusion Trust.
Wall Street Journal, Wed. Feb. 15, 2006, By Tom Herman and Rachel Emma Silverman
HOW TO FIGHT THE IRS
Think you can escape paying taxes, think again!
The IRS has recently stepped up its attempts to collect on overdue taxes. They are doing everything from audits to asset seizures. Those at jeopardy are individuals who make at least $100,000 yearly and have indications of cheating on their taxes or other forms of tax-dodging. Self-employed workers are also at high audit risk.
This year a growing amount of Americans will receive a wake up call from Uncle Sam.
If this happens to you, here are some things to consider:
How much money is at stake?
Is it going to cost more to fight them in court rather than pay them what is owed?
How confident are that you will win?
Do you have documentation and are your records accurate?
Action to take if you receive an IRS letter challenging a return?
Here are some of your choices:
Appeal it. To do this you can resolve the issue over the phone of face to face. You can represent yourself, have a lawyer present, CPA, or use an enrolled agent.
Secondly, you can try contacting the IRS TAXPAYER ADVOCATE SERVICE. This service can help when other attempts to reach the IRS have failed. Visit www.irs.gov/advocate to find an office near you.
Your third option is to take it to the courts. However, be apprised that in most cases that went to court, tax payers had to pay their taxes first and then file a refund claim in court.
Lastly, if you can’t pay all of your tax liability in one sum, you can request installment payments. Generally, the IRS is willing to work with you if you make an effort to acknowledge and satisfy your tax bill.
