Welcome to the Tax Blog

News, information, and opinions about:

  • Federal, State, and Virginia Beach Taxes
  • The Tax Preparation Business
  • Tax Planning

If you have a question or comment, please drop me a line. Paul @ PIM Tax.

08 July 2015

For Virginia residents, Virginia 529 plans are a great way to save for college. Your contributions get you a break on your Virginia state income taxes. Earnings and growth within the account escape both state and federal income taxes, as do qualified distributions from the account when it is time to pay for college. That's a whole lot of good things stacked up in one account - what could go wrong?  In a word: plenty.

The federal government offers some very valuable tax credits to help make college more affordable. The American Opportunity Credit (AOC) pays you back dollar-for-dollar on the first $2,000 you spend on tuition and required fees, plus 25% on the next $2,000. Spend $2,000 on tuition, get $2,000 back in tax credits. Spend $4,000 on tuition, get $2,500 back in tax credits. AOC can only be used for undergrad education, and can only be used 4 times per student.

If you run out of AOC eligibility the Lifetime Learning Credit (LLC) kicks in. You can get 20% back on the first $10,000 you spend on tuition and required fees. Spend $10,000 on tuition, get $2,000 back in tax credits. The LLC can be used for any accredited post-secondary education, and as many times as you want. You just can't use AOC and LLC for the same expenses.

The AOC and LLC are very valuable - more valuable than having a 529 plan. Fortunately, you can have your federal tax credits and a 529 plan, too. You just have to be careful. If executed poorly the 529 plan could cancel your eligibility for the federal tax credits, potentially costing you thousands of dollars annually. Tax break fratricide - one tax break killing another.

The way the 529 can interfere with eligibility for the federal tax credits is a little complex, which is probably why the mistake is easy to make. Essentially, you cannot claim the tax benefits of the 529 and a federal tax credit for the same education expenses. It makes sense, but the sequence of events can trip you up on this. Tuition is due in the year before you file for the federal tax credits. You would naturally think to use your available 529 money when the tuition comes due. This would be a mistake. Since the federal tax credits can only be used for tuition, if you pay the tuition with 529 money you cannot claim either of the (more valuable) federal tax credits when you file your tax return the following year.

In my opinion this makes the prePAID 529 plan especially risky. The prePAID plan is designed specifically to pay for tuition at some point in the future. This virtually guarantees you can't get the federal tax credits because you are using 529 money to pay the tuition. (You can take the money out of a Virginia 529 prePAID plan in cash and use it for other 529 qualifying expenses such as room and board, but you only get the original contributions back plus money market interest - not a great investment.)

Higher income families won't qualify for the federal tax credits. In 2014 AOC was completely phased out at $180K modified AGI for joint filers, half that for everyone else. LLC was completely phased out at $128K modified AGI for joint filers, half that for everyone else. Additionally, if you're married filing separately you are not eligible for the AOC or LLC. If you're not going to be eligible for the federal tax credits, then use the heck out of the 529 plans, even the prePAID plan. They can't interfere with the federal credits if you don't qualify for them. Just don't forget that your child will be filing separately from you at some point. Don't wreck his/her eligibility for AOC or LLC with a 529 plan.

The Virginia 529 Plans are fantastic. No one should think I am telling you to avoid them. (I have several Virginia 529 accounts!) It's the only way to get a tax break for room and board - which can be a significant portion of the college expenses. The 529 Plans just need to be part of an overall integrated college financing strategy so that you don't end up with one tax break cancelling another. You can get both if you prepare properly.

If you have any questions, please contact me: Paul @ PIM.


05 July 2015

I am commonly asked whether it is more advantageous for a married couple to file their tax return(s) jointly or separately. It's a good question. It shows two things; the person asking it is considering legal options to minimize their tax burden, and the person has knowledge that there are filing status options within the tax code. I like to work with thinking people.

Unfortunately, my answer almost always disappoints. It is usually more advantageous to file jointly. This answer disappoints because the person asking it has been filing jointly, and he or she hoped that filing separately would lower their taxes in the future. Sorry to say joint returns are almost always the way to go.

Filing separately reduces or eliminates eligibility for several adjustments, deductions, and credits and normally results in a higher amount of tax being owed. Filing separately adversely impacts the following tax benefits:

  1. In most cases you cannot claim the credit for Child and Dependent Care Expenses.
  2. You cannot claim the Earned Income Credit.
  3. You cannot claim any education credits.
  4. You cannot claim the adjustment for Student Loan Interest.
  5. You cannot claim the exemption for interest on EE bonds used for education.
  6. Your Child Tax Credit is half what it would be on a joint return.
  7. Your Capital Loss limit is cut in half.
  8. Your Saver's Credit is cut in half.
  9. You cannot claim losses on real estate rental property (if you still live with spouse)
  10. Your Alternative Minimum Tax Exemption is cut in half.
  11. Your standard deduction is cut in half.
  12. If your spouse itemizes you can't take the standard deduction at all.
  13. You expose more Social Security to being taxed.
  14. You cannot claim the adoption credit, and if you received adoption benefits from your employer they are now taxable.
  15. Not really a tax benefit, but if you file separately your tax preparer will charge you for preparing two returns. Jointly, just one.

That's quite a list. Just looking at it makes it clear to me that if you are married the government wants you to file jointly.

There are, however, some circumstances that make filing separately more advantageous. The most common scenarios for this are when:

  1. One spouse has a lien against his or her tax refund(s) for failing to pay past taxes, non-payment of child support, or defaulting on federal student loans. When spouses file jointly they assume mutual responsibility for each others taxes. If one spouse has a lien against their taxes the refund from both spouses will go to pay off that debt if they file jointly. Filing separately protects the refund of the spouse without the tax lien.
  2. You suspect your spouse is cheating on their taxes. If you file jointly both spouses sign the return and are liable for its accuracy. If you suspect (or know) your spouse is filing fraudulently you should file a separate return to protect yourself from penalties.
  3. In rare circumstances a smaller tax (larger refund) can occur. This can happen when there is a large disparity between the spouses' incomes and there are significant deductions. For example, A surgeon (AGI $300,000) and a school teacher (AGI $55,000) are married. The school teacher has $25,000 in medical bills. If they file jointly the medical bills do not exceed 10% of their combined AGI ($35,500) and are therefore not deductible. If the school teacher files separately and claims all of the medical bills then the amount over $5,500 (10% of AGI) is deductible (a deduction of $19,500). Depending on the rest of their tax situation this could lead to a lower overall tax bill for this married couple.

As I said, there are significant tax incentives for married couples to file jointly, so it is most often in the best financial interests of spouses to file a joint tax return. There are some circumstances where filing separately is more advantageous. If you think this might apply to you it is best to consult a tax professional to discuss your situation.

30 JUNE 2015

For the most part I enjoy preparing taxes. Each return is like a new puzzle to solve. There is a solution that gives the lowest possible legal tax, and I want to find it. Some people like Sudoku, I like tax returns.

Soon after I started working as a tax preparer for one of the national tax mills I noted the fees being charged seemed inconsistent. I might spend 25 minutes completing a simple return and the fee would be $275. I could spend 90 minutes on a more complex return and the fee would be $140. It puzzled me, so I set about trying to solve the puzzle. What I found rubbed me the wrong way.

Fees were set by the corporate office, and I had virtually no power to change them in any way. Nor could I accurately predict them. I found out the fee for a tax return at the same time as the client. The software worked sequentially. The screen showing the fee was near the end of the process, after all of the tax prep work was completed. Before progressing to the fee screen I would silently try to guess what the fee would be. I would often have to suppress my shock when the fee was revealed. It was not uncommon for my guess-timate to be off by 50% or more. (And I was the one doing the actual work!)

Most tax prep firms charge by the form, and we were no different. At first glance this seems like a fair way to charge for tax preparation service. The more forms required for a tax return, the more work the tax preparer has to do, right? 

In fact, this is rarely the case. The software we use auto-populates all of the forms from a single entry of client data. For example, once I enter your child's SSN and birth date, your W2 information, and the amount you spent on daycare all of the forms and worksheets to calculate your child credit, child care credit, additional child credit, etc. are done for me by the software. I don't have to lift a finger. There is no direct correlation between the forms generated and the effort required to generate them.

While I was never able to accurately predict the fees for the returns I was working, I did note some trends:

  • The fees were higher when the refund was large.
  • The fees were higher when the AGI was large.
  • The fees were higher when the tax filing deadline was close.

Essentially, the clients paid more when they could afford it or when they were running out of options to get their taxes completed on time. I think that's ridiculous.

I believe the fee charged should directly relate to the service rendered. I also believe both the client and the tax preparer should be able to accurately figure out what the fees will be as soon as the structure of the tax return is known - not wait to find out what the costs are after the return is completed. It seems so basic. I'm not sure why it isn't universal.


Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a proud member of the National Association of Enrolled Agents, the National Association of Tax Professionals the Financial Planning Association of Hampton Roads, the National Association of Personal Financial Advisors (NAPFA), and The Tidewater Real Estate Investors Group. You can read more about Paul's background here.

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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)


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