Koirala Capital | Accounting Blog

Is That Financial Aid Taxable?

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The college search process is an exciting but time-consuming process. After your child narrows down the colleges of his or her choice, you both have to figure out the issue of paying for tuition and room and board. The reality is that a four-year college education is expensive. The College Board1 reported that the average annual published tuition and fees for in-state students at a four-year public college was $11,260 for the 2023-2024 school year, $29,150 for out-of-state tuition and fees at a four-year public college, and $41,540 per year for a four-year private college. However, colleges typically offer scholarships or discounted tuition rates for students who are high achievers academically or distinguish themselves in sports, the arts, music, or other field. Grants and work-study programs can also help reduce the final price tag of a college education.

Student Aid Trends

In 2022-2023, undergraduate students received an average of $15,480 in financial aid, including grants ($10,680), federal loans ($3,860), education tax credits and deductions ($850), and federal work-study ($90).2

Financial Aid and Taxes

If your child is awarded financial aid for college expenses, you may be concerned that taxes will be due on that aid. As always with taxes, it depends on the circumstances. In general, gift aid, including scholarships and fellowship grants that are paid to an individual to assist in the pursuit of study or for research, is not taxable if:

  • The recipient is a degree candidate at an eligible educational institution – defined as one that has a faculty, a curriculum, and a regularly enrolled group of students.
  • The funds are either designated for tuition and related expenses – required fees, books, supplies, and equipment – or are unrestricted and the amount does not exceed tuition and related expenses. Expenses for room and board do not count.
  • The award is not payment for services such as teaching or research.

Excess aid is considered taxable income to the student. Nonetheless, a student’s standard deduction may be enough to shelter any earned income from income taxes.

Other Options for Parents

Saving for college through a Section 529 plan delivers valuable tax benefits. The money in a Section 529 plan grows on a tax-deferred basis, and 3 distributions for qualified educational expenses are free of federal income tax. Additionally, many states offer some form of state income tax deduction or credit for contributions to a 529 plan.

Work With a Professional

Deciding where to go to college is both an exciting and stressful decision for young people. Figuring out how to pay for it can cause parents many sleepless nights. That’s why it can be helpful to obtain the input of a financial professional well before your child makes his or her choice as to where to attend college. A financial professional may be able to offer unique insights and advice on how parents can afford college for their children.

1The College Board, “Trends in College Pricing and Student Aid 2023.”

2Figures are per full-time equivalent student.

3Certain benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used. Before investing, consider the investment objectives, risks, and charges and expenses associated with municipal fund securities. The issuer’s official statement contains more information about municipal fund securities, and you should read it carefully before investing.

Frequently Asked Questions About Estimated Taxes

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Quarterly Estimated Tax Payments can be a nightmare for business owners to determine how much they owe the IRS. Here is our guide for Frequently Asked Questions regarding Estimated Taxes.

What are Estimated Taxes?

Estimated Taxes are taxes that are paid to the IRS throughout the year on earnings that are not withheld from the federal government. Most people pay these taxes on a quarterly basis.

Who pays estimated taxes?

Unlike individual workers who receive a traditional paycheck from their employer, business owners and 1099 workers are required to pay estimated taxes.

You can also be eligible to pay estimated taxes for income you have earned on the side through investments such as realized capital gains or dividends.

Sometimes, W-2 workers can end up not withholding enough to cover their taxes and need to pay estimated tax payments as well.

What are the Tax Payment Dates for 2024?

  • If you earned income from Jan. 1 – Mar 31, 2024, your estimated payment deadline is April 15, 2024.
  • If you earned income from April 1 – May 31, 2024, your estimated payment deadline is June 17, 2024.
  • If you earned income from June 1 – Aug 31, 2024, your estimated payment deadline is September 16, 2024.
  • If you earned income from Sept. 1 – Dec 31, 2024, your estimated payment deadline is Jan. 15, 2025.

How much do I need to earn to be eligible for estimated payments?

  • Workers that have not withheld enough: You will owe at least $1000 in federal income taxes
  • Self-employed individuals: If you expect to owe more than $1,000 from your gigs, you should pay quarterly estimated taxes as there is no tax being withheld on your income.
  • Businesses: You should make estimated tax payments if you expect to owe $500 or more for the entire tax year.

How do I figure out how much I owe?

There is a reason they are called estimated taxes unfortunately. You need to estimate your projected annual income to determine your tax bill. You can use data from your previous year to help you figure out how much to send. For example, if you think you will owe $12,000 at the end of the year, you should send $3,000 quarterly. This works best if you have a stable income.

If your income varies, you can estimate how much you owe by your previous quarter. The IRS has plenty of resources to help business owners.

Can I pay more often than quarterly?

Yes, similar to paying off a credit card expense, you can pay as soon as you want, and not just on the listed deadlines. It is a good idea to pay more frequently if you are nervous about underpaying.

What happens if I underestimate my tax payment?

If you underpay your estimated tax payment, you will receive a penalty from the IRS. This penalty is determined by how much you underpaid at the deadline plus the interest rate the IRS will apply to how much you still owe. Paying quarterly helps to prevent this.

What happens if I overpay my tax estimate?

You will receive an overpayment credit of the refund that you can either receive or ask the IRS to use as an advanced payment towards next year’s taxes.

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Many individuals find it difficult to manage their estimated taxes because they are scared of messing up. Having a better understanding of how they function makes it easier to process your payments each year. For more information, call our business today!

Saving for Two

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An employer’s 401(k) plan (or similar retirement plan) can be a good way for people to save for retirement. But what if your or your spouse’s employer doesn’t offer a retirement plan?

According to the U.S. Bureau of Labor Statistics,* 69% of private sector workers have access to a workplace retirement plan. Since most people don’t save for retirement outside of their workplace plans, often only one person in a dual-earner couple is saving. And while you probably want to save enough to maintain your preretirement standard of living, 401(k) plans are designed for individuals, which makes it difficult to save for two.

Plan Design

The specific design of a 401(k) plan is a main deciding factor in how much individuals contribute to their plans. Many plans offer auto-enrollment, where employees, upon eligibility, are automatically enrolled in their workplace retirement plan at a default contribution rate, which usually determines the rate at which employees save in their plans. Another feature in 401(k) plan design that influences contribution rates is the employer match. Employees may contribute at the rate necessary to receive the full employer match and often will increase their contribution amount to that rate, but they won’t go beyond it.

These plan design features are targeted to help individuals save and do not take a spouse into consideration. Therefore, if you have a non-saving spouse, you may need to reevaluate and increase your contribution amount.

Closing the Gap

Incorporating certain features in a 401(k) plan’s design could help employees save more. For example, marital status might be considered when setting default contribution rates. Another plan feature that may help is auto-escalation, or incrementally increasing plan contribution rates automatically over time. As with auto-enrollment, employees have the opportunity to opt out instead of opting in, making it more likely that they’ll just let it ride. Educating employees about the need to save more to cover a non-saving spouse is also important.

However, saving enough for retirement is ultimately an individual responsibility. What can you do to help ensure you’ll be able to retire comfortably? Here are a few tips:

  • Set a savings goal. Your financial professional can help you determine a target amount based on your projected retirement income needs.
  • Consider increasing your plan contribution. Look beyond your employer match to determine your contribution rate. Take advantage of features like auto-escalation while also evaluating how much you can increase your contributions on your own. Remember that although you may have only one retirement plan, your combined incomes may make increasing your contribution rate not only desirable but also affordable.
  • Consider using a traditional or a Roth individual retirement account (IRA) to supplement savings in an employer plan. A married individual may contribute to a spousal IRA even with little or no direct earnings. Keep in mind that specific tax rules apply to different IRAs, so you may want to consult a tax professional before investing.
  • If there’s a significant age gap between you and your spouse, plan for retirement with the younger spouse’s life expectancy in mind. You may have to adjust your asset allocations if you follow age-based guidelines, and you may need to scale back on withdrawals later on since you will likely have a longer combined retirement. On the other hand, if you and your spouse are close in age and are nearing retirement, you may want to consider staggering your retirement dates in order to keep saving in your plan a little longer.

Before taking any action, please consult with your tax and financial professionals.

How Do You Determine How Much to Pay New Hires?

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Small business owners know that high performers seek out jobs that offer them an opportunity to grow and to develop professionally. Benefits are also important to job seekers. However, salary plays a major role in the decision to accept a job offer. Every owner of a small business struggles with the question of how much to pay a new hire.

As a small business owner, you understand that applicable wage and hour laws are an important factor in that decision. But beyond these legally mandated requirements, what else should you look at when trying to figure out a compensation rate that is fair and competitive? Here are some issues that you should review.

Education and Experience Requirements

It’s a given that jobs that require a specialized set of skills, long experience, or extensive educational background will be harder to fill than jobs that require only very general skills. Employees with in-demand skills expect a premium salary. If you find a likely candidate for an important position within your company, you may want to determine what others in your industry and in your location are paying for that type of job before you make that prospective employee an offer. The Bureau of Labor Statistics (BLS) website is a good source for information on employment and wage statistics for various occupations throughout the country. BLS data is broken down into occupational types as well as various subcategories within that occupation.

The Nature of Your Industry

Certain industries, such as engineering and health care, typically pay employees more in wages and benefits than other low-paying industries, such as hospitality and retail. However, you may have to consider paying above-market wages and benefits if the job you want to fill is critical to the profitability of your business. That could be particularly necessary if your business is located in a region where the cost of living is higher than the national average.

Supply and Demand Issues

If you are located in a region where labor is plentiful, you may be able to pay the going rate for the workers you need. However, if the talent you need for your business is in short supply, you may have to get into a bidding war with other employers in your region.

The Candidate’s Value to Your Business

Ask yourself: What value will the job candidate bring to your business? How much revenue can you expect the candidate to generate in the first 12 months? What skills do they possess that can help move your business forward? You want to come up with an approximate salary that you can justify, one that aligns with your expectations of the candidate’s potential contributions to your business.

What Does the Job Candidate Expect?

Take the time to understand why a particular candidate is interested in working for your business. During the interview process, try to determine what it is that drives them: more responsibility, a salary increase, or a career path towards management. Their answers can help you formulate an offer that is acceptable to both sides. Clarify what their expectations are in terms of benefits and how important benefits are in their final decision about whom to work for. Many candidates who prioritize working remotely part-time or a solid health insurance package may be willing to take a smaller paycheck in return for the benefits they truly want.

The reality is that finding the right candidate for a critical job at a salary you can live with is tough. Your financial professional can help run some numbers so that you can have a better idea of what you can afford to pay an employee who will be a valuable asset to your organization.

Projects That Add to the Value of Your Home

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You only have to look at the number of home remodeling shows on television to understand just how many people enjoy watching others upgrade their living spaces. These popular home remodeling shows have inspired many people to try their own hands at various remodeling projects.

If you are interested in having work done on your living space or doing it yourself, you should understand that some remodeling and construction projects will enhance the value of your home as well as its appearance. Other remodeling projects may be on your wish list and make you happy but won’t materially affect the value of your home.

What projects will add to the value of your home? According to the “2023 Cost vs. Value Report” conducted by Remodeling, a leading trade publication/platform, the top five renovations that increase — or come close to increasing — home value are as follows:

HVAC Conversion

Switching out your fossil-fuel burning furnace to a more environmentally friendly alternative — an electric heat pump — is an expensive undertaking but easily recoups its cost. Typically, the cost of converting a 2,000-square-foot home to an electric heat pump is estimated to be $17,747, but the report notes that it adds about $18,366 to the home’s resale value — a 103.5% return on the investment.

Garage Door Replacement

A new garage door definitely enhances a home’s curb appeal and easily recoups its initial cost. The report found that removing and disposing a 16- by 7-foot garage door and replacing it with four-section doors with heavy galvanized steel tracks would cost $4,302 on average but would boost the home’s resale value by $4,418, a 102.7% return on investment.

Manufactured Stone Veneer

Stone veneer has grown in popularity amongst homeowners looking to craft a warm and welcoming feel to their homes’ exterior. It costs an estimated $10,925 to install 36 linear feet of sills, 40 linear feet of corners, an address block, and other materials, including water-resistant and corrosion-resistant barriers. However, homeowners will recoup 102.3% of the project’s cost if they put their home on the market.

Replacing an Entry Door

New front doors can help improve a home’s energy efficiency as well as enhance its appearance. Replacing an old entry door with a new steel one will cost an average of $2,214 but will increase your home’s resale value by $2,235, recouping 102.9% of its original cost.

Replacing Siding

Replacing a home’s siding is an expensive undertaking, but it is one project that delivers immediate eye appeal. New siding refreshes a house’s appearance and adds to the neighborhood’s overall desirability. The report looked at the costs of installing both fiber-cement siding and vinyl siding. It found that the average cost of installing 1,250 square feet with fiber-cement siding would run a homeowner $19,361. The homeowner would expect to recoup 88.5% of the cost of the project, or $17,129. Installing new vinyl siding would be less costly than fiber-cement siding. Siding for a 1,250-square-foot house would cost an estimated $16,348, and the homeowner could expect to get back around 94.7% of that total cost at resale.

Be aware that labor costs vary from state to state and from community to community. The cost of materials fluctuates, sometimes considerably, depending on inflation, supply chain issues, and other economic and political forces.

The Benefits of Laddering for an Income Investor

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If you are investing in bonds for income, you most likely want to minimize any risk of loss to your portfolio. Since no investment is entirely risk free, you need to understand where the risks with bonds lie. One risk is the possibility that the issuer won’t pay the interest or repay the principal at maturity. There’s also reinvestment risk, or the risk that your bonds will mature while interest rates are falling. When that happens and you buy new bonds with a lower interest rate, you reduce the income stream that you are depending on.

Laddering is a strategy that minimizes the risk of being locked in at a single interest rate and provides added liquidity to your portfolio. It involves buying a series of bonds (perhaps from different issuers) with a range of maturities. The staggered maturities of the “laddered” bonds can reduce the likelihood of you dealing with reinvestment shock if interest rates happen to be lower when some of your bonds mature. Creating a laddered portfolio can help even out volatility in your income stream while allowing you to estimate how much your portfolio will yield from year to year.

Another benefit of a diverse,* laddered portfolio of bonds is that it can reduce your exposure to default risk. The default of one issuer in a portfolio that holds bonds from multiple issuers is less damaging than it would be in a portfolio concentrated in bonds from just one or two issuers.

The Mechanics of Laddering

As an example, assume that you divide up your portfolio by buying equal dollar amounts of bonds with two-, four-, six-, eight-, and 10-year maturities. So, the average maturity in your portfolio is six years. As each bond matures, you replace that bond with one equal to the longest maturity in your portfolio. For example, when your two-year bond matures, replace it with a 10-year bond. The 10-year bond you initially purchased now has eight years until it matures. And the eight-year bond has six years to maturity and so on. Despite these changes, the average weighted maturity of your portfolio does not change — it remains at six years.

When interest rates fall, your laddered portfolio protects you since the longer maturity bonds at the top of the ladder are still paying above-market rates. And when interest rates start climbing, you reinvest maturing bonds at the bottom of the ladder in higher yielding, longer maturity bonds.

You can also use laddering as a strategy if you are investing in certificates of deposit (CDs) for income. The principle is the same except you are buying bank-issued CDs instead of bonds.

As an income investor, ensuring a steady, predictable stream of income is critically important. Your investment professional can help you determine if laddering bonds or CDs is a smart strategy for achieving your goals.