Running Head: Tax Plan Advice 1
Best Possible Tax Plan Advice for John
Tax Plan Advice 2
John intends to make tax planning and save for the education of his children. He has been
looking at possible tax saving options from diverse areas, including contributions arising
from home equity appreciation, stock income, tuition tax credit, and benefits from Individual
Retirement Accounts (IRA) or Roth. His adjusted net gross income is $ 135,000, and he has a
mortgage worth $ 500,000. In the specific scenario, an ideal choice that John can consider is
an Individual Retirement Account or Roth since their benefits exceed that of other available
options.
Although a second household mortgage can enable homeowners to make a borrowing against
their home equity, it has a disadvantage. The interest rate is smaller and fixed in comparison
to other debt options. The Tax Cuts and Jobs Act (TCJA) of 2017 does not allow the
deduction of interest when it comes to domestic equity indebtedness (Internal Revenue
Service, n.d.). As per the new law, the amount is deductible if it is used for making
improvements to one’s home; hence it is not applicable in John’s case. a a a
A number of educational tax credits are available, including Lifetime Learning Credit (LLC)
and American Opportunity Credit (AOC). But John is not eligible for LLC as his income is
beyond the eligibility limit (Internal Revenue Service, n.d.). Under the AOC option, he is
eligible, and he can take a yearly tax credit of $ 2,000. Additionally, he can take a 25 % yearly
credit over $ 2,000, but it should be below $ 4,000 for any extra qualified expenses. In this
case, credit is applicable only for the initial four years of post-secondary education (Legal
Information Institute, n.d.).
Since John has short-term and long-term investments, he can sell them so that he can send his
children to college in the future. In the case of short-term investment gains, the standard
income tax rate is applicable. However, in the case of long-term gains, the tax rate may vary
between 0 %, 15 %, and 20 %, depending on the taxable income (Internal Revenue Service,
Tax Plan Advice 3
n.d.). John’s income from his investment sales may expand his income tax rate sustainability
by heightening his tax bracket. Up to $ 15,000, the investment is free from any tax for his
children, and his wife can contribute an additional $ 15,000 towards their children’s
education. However, a downside to this is that in the future, the children will have to pay tax
on the gift at the income tax rate of John.
The most suitable option that John must consider is to make use of the Individual Retirement
Account or Roth option. John has a traditional IRA, and he intends to transform it into Roth.
A Roth account will enable John to contribute funds after tax. It implies that he will not have
to make payments of tax relating to any contributions towards his pension. Since there is no
set income limit for converting an IRA into a Roth account, John is eligible to make the
conversion. However, a major drawback that he must bear in mind while opting for the
conversion is that his tax bracket will increase, and tax will have to be paid on the amount that
is converted.
Generally, individuals are supposed to pay a penalty of 10 % in case they make an early
deduction from their IRA account (Internal Revenue Service, n.d.). However, as per
Publication 590, although John is below the age of 59 ½ years, he will not be subject to any
fine since he will be using the deduction for the purpose of paying for an eligible expense
relating to the higher education of his children (Internal Revenue Service, n.d.). This
condition is applicable if the other available alternatives, such as donations, mortgages, and
the 529 plan, fail to cover the expenses. The Roth account is an ideal option for John since it
will help him to avoid the application of taxes on his disbursements, and moreover, it will also
eliminate the 10 % penalty that he would have to pay for early withdrawal from his IRA
account. Although initially, John will have to pay extra tax because of the transition to Roth
from IRA, in the long run, it is the most viable financial option.
Tax Plan Advice 4
Reference
About publication 590-A, contributions to individual retirement arrangements (IRAS).
Internal Revenue Service. (n.d.-a). https://www.irs.gov/forms-pubs/about-publication-
590-
a#:~:text=Publication%20590%2DA%20discusses%20contributions,setting%20aside%
20money%20for%20retirement.
LLC: Internal Revenue Service. LLC | Internal Revenue Service. (n.d.).
https://www.irs.gov/credits-deductions/individuals/llc
Legal Information Institute. (n.d.). 26 U.S. Code § 25A - American Opportunity and Lifetime
Learning Credits. Legal Information Institute.
https://www.law.cornell.edu/uscode/text/26/25A
Topic no. 409, Capital Gains and losses. Internal Revenue Service. (n.d.).
https://www.irs.gov/taxtopics/tc409
Part I section 163.—interest - Internal Revenue Service. (n.d.). https://www.irs.gov/pub/irs-
drop/rr-2010-25.pdf
What if I withdraw money from my Ira?. Internal Revenue Service. (n.d.).
https://www.irs.gov/newsroom/what-if-i-withdraw-money-from-my-
ira#:~:text=Generally%2C%20early%20withdrawal%20from%20an,10%20percent%20
additional%20tax%20penalty.
