Written by Matt Benson, CFP®
One of the many challenges in financial planning is understanding the rules that govern decision making. If the law never changed it would no longer be a variable to account for. If the past few years of economic disruption and policy response have taught us anything, it's that changing policy can dictate changes to your planning.
Over the past several years, it was not uncommon to see sweeping federal legislation highlighting changes in many areas. Did your state conform to that legislation immediately? What did the Department of the Treasury and the folks over at the IRS interpret that legislation to mean? Below I highlight two examples we encountered recently where the tax law(s) are confusing. In both situations, we hope to get more clarity around the "rules" soon.
Education planning for children and grandchildren is an important planning goal for many of our clients. The tax benefit of contributions to Section 529 plans, a tool geared toward college savings, is tax free growth of your investment so long as it is used for qualified higher education expenses.
What you may not know is that beginning in 2017, Minnesota allowed for a state tax deduction for contributions to those plans. These do not generate tax forms so make sure to share this information with your tax preparer.
Additionally, with the rising costs of K-12 and college, federal legislation was enacted in 2017 to allow for tax-free distributions up to $10,000 annually for K-12 expenses. That all sounds great until you go file your taxes and find that the federal government recognizes that as tax-free, but the state does not. That is the case with Minnesota. There are 21 states that currently do not conform with federal legislation. In cases where K-12 expenses need to be met, given the current rules, we can develop strategies to help you fund that expense elsewhere while allowing 529 assets to continue to grow tax-deferred.
Paycheck Protection Program
There has been much confusion related to the Paycheck Protection Program offered to small businesses. The federal legislation came out, the funds were received in most cases and then the IRS had its interpretation. It was agreed upon that it would be federally tax free. Some states, including Minnesota, do not conform to the legislation, making any PPP proceeds taxable. That can create quite a headache for small business owners. Minnesota has legislation in process, but your taxes are due on May 17th!
There is a lot of information to fill a 24-hour news cycle and we live in a world where it seems to be boiled down to snippets and headlines. It is very difficult to comb through what is relevant in a timely manner. We have a team that spends a lot of time doing that leg work for you. Use us as a resource if you have questions. The chances are good that your situation is one we have encountered before.