Scholarships Taxable or Not
The really great thing about receiving a scholarship is that the award doesn't have to be paid back. But does a scholarship represent taxable income? It doesn't as long as certain conditions are satisfied. Here's a brief rundown of what's required for tax-free treatment.
Candidate for a degree. The recipient must be a degree candidate at an educational organization that maintains a faculty, curriculum, and body of students. Qualifying institutions include primary, secondary, and preparatory schools, as well as colleges and universities.
Not a stipend. Generally, the award cannot be payment for services. It will be taxable if it compensates the student for teaching, research, or similar activities.
Qualified expenses. A tax-free award can only be used for tuition and required expenses (such as fees, books, supplies, and equipment) and not for room and board. Expenses that are merely "suggested" for a particular course — such as a laptop computer — do not qualify. The recipient should keep records (e.g., bills, receipts, canceled checks) to demonstrate that the award was used for qualified expenses.
It's possible that a portion of a scholarship will be tax free and the remainder will be taxable. We can help you apply the tax rules appropriately if you or your child receives a scholarship.
Employment taxes are an issue for any business that has employees. But did you know you may have federal employment-tax responsibilities if you hire someone to work for you in your home? The so-called "nanny tax" rules can apply when you hire any type of household worker ? a nanny, housekeeper, gardener, etc. ? who is not an independent contractor.*
Social Security and Medicare taxes (FICA). Both the household employer and the employee must pay FICA tax. Generally, the Social Security tax is 6.2% of wages and the Medicare tax is another 1.45% (a total rate of 12.4% for Social Security and 2.9% for Medicare).
In 2015, you are responsible for paying (and withholding the employee's share) of FICA taxes if you pay your household employee $1,900 or more in cash wages. If you expect to meet the annual threshold, it's smart to start withholding right from the start. This will avoid having to withhold additional taxes from your employee's pay after the employee reaches the $1,900 threshold.
Income tax. As a household employer, you are not required to withhold federal income taxes from your employee's pay, but you can if your employee asks you to do so.
Federal unemployment tax (FUTA). Your FUTA obligation begins when you pay $1,000 or more in cash wages to household employees in any calendar quarter of the current or past year. Employees have no FUTA obligation.
Unless you own your own business, you report your household employment taxes on Form 1040, Schedule H. (Sole proprietors may report FICA and FUTA taxes for household employees on the Forms 940 and 941 they file for their businesses.) To cover your share of household employment taxes, you can increase your quarterly estimated tax payments or have your employer withhold more tax from your pay.
Increase in Nontaxable Estate Returns
According to the IRS, more federal estate-tax returns were filed for nontaxable estates in 2013 (5,881) than in 2012 (5,673). The increase in filings is most likely the result of the recently enacted "portability' provisions, which require nontaxable estates to file a federal estate-tax return to preserve any unused exclusion amount for the surviving spouse.
Higher 2015 Contribution Limits
The IRS announced that for 2015, the elective deferral and catch-up contribution limits for 401(k), 403(b), and 457 retirement plans have increased to $18,000 and $6,000, respectively. Annual contribution limits for both traditional and Roth individual retirement accounts (IRAs) remain unchanged at $5,500 ($6,500 for individuals age 50 and older), though certain income-based restrictions on contributions to these accounts have increased slightly.
The general information in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.