July/August 2019 Tax Tips

Helping employees pay down student loan debt

In a 2018 private letter ruling, the IRS gave its blessing to an employer’s innovative student loan repayment (SLR) program. Essentially, the ruling allowed the employer to link matching contributions to employees’ 401(k) plan accounts to either 1) the amount of elective contributions an employee makes to the plan or 2) the amount of student loan repayments an employee makes outside the plan. Although the ruling applies only to the specific employer that requested it, it may create an opportunity for other employers to offer tax-advantaged student loan assistance to their employees, provided they design these programs carefully and follow the ruling’s guidance.

Upstream estate planning offers significant income tax benefits

Much of estate planning revolves around “downstream” strategies — that is, shifting wealth to your children or others in the younger generation. But “upstream” strategies involving gifts to your parents can also be effective, especially if you and your parents’ estates are well within the gift and estate tax exemption amount. Here’s one example:

Say you own rental residential real estate with a fair market value of $1 million and, as a result of depreciation deductions over the 15 years you’ve owned it, an adjusted basis of only $100,000. If you were to sell the real estate now, you would trigger a $900,000 gain. Suppose, instead, that you gift the property to your mother. Three years later she dies, and the property passes back to you as part of her estate. You receive a stepped-up basis in the property equal to its fair market value at that time, which has grown to $1.2 million, and can sell the property income-tax-free. Be aware that, under the tax code, this strategy won’t work if you or your spouse inherits the property within one year after gifting it.

Overlooked charitable deductions

Most people know that they can claim cash or property donated to charity as itemized deductions. But some overlook deductions for properly substantiated out-of-pocket expenses associated with their charitable activities. For example, if you prepare baked goods for a charity fundraiser or cook food for a soup kitchen, you can deduct the cost of the ingredients. And if you use your car for charitable work, you can deduct 14 cents per mile. The U.S. Tax Court has even ruled that the cost of a babysitter who watches your kids while you do volunteer work for a qualified charity is deductible.

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