Did you know that account earnings for minors - children under 18 - may have tax consequences known as the Kiddie Tax? (Full time students up to age 24 may qualify.)
In 1986 the IRS passed the Kiddie Tax to prevent adults from stashing money in their children's accounts to take advantage of the lower tax rate applied to children's earnings.
Children's unearned income - dividends, interest and capital gains - under $1050 (for 2016) is tax free. The next $1050 of unearned income pays a very low rate but any unearned income over $2100 gets taxed at the parents' rate!
The rule applies to taxable investment income not to earned income from a job. Owning stocks that don't pay dividends or tax-exempt municipal bonds, avoids this issue.
If you plan to fund an education account for a niece, nephew, grandchild or friend, a 529 plan will grow tax-deferred and money distributed tax-free for higher education. Funding an UGMA (unified gift to minors account) has the potential of producing taxable income. Plan to have a conversation with the youngster's parents beforehand to determine which account would be suitable.
Be $ Smart - Consult your tax adviser to learn if your child's accounts may be subject to the Kiddie Tax.
Showing posts with label 529 plan. Show all posts
Showing posts with label 529 plan. Show all posts
Thursday, January 21, 2016
Friday, October 2, 2015
Costs of College
Back to school brings parents a sigh of relief in one sense but it also brings to mind the cost of higher education.
If your student is bright and talented, there is a possibility he/she might qualify for Merit Aid. Be aware that some elite colleges may not offer merit aid to all students. Merit aid might be only offered for certain majors, e.g. engineering or computer science or particular talents, e.g. music, dance, athletics.
Parents need to research those colleges offering merit aid and learn the criteria needed to quality.
Financial Aid (need-based) may be available based on the student's family situation. The formula: cost of attendance - the Expected Family Contribution = need, determines eligibility. The EFC, the result of two formulas from FAFSA and CSS Profile, is the amount a family can afford to pay each year.
Parents need to learn their EFC early and develop a strategy to make their student eligible for aid.
Student loans are both a help and a curse. Over time, the interest can add tens of thousands of dollars to the cost of college. Parents borrow from home equity, retirement plans and Parent Plus loans all adding the interest costs to the college expense.
The key is to borrow the bare minimum, search for the lowest interest rates and pay off everything as soon as possible!
529 Plans are an effective way to plan for college:
- They can be set up as a systematic deposit.
- Depending on your state, they may offer a tax credit.
- The gains are not taxed when used for qualified college expenses.
- They reduce the amount of money taken in loans.
Be $ Smart - do some homework, plan ahead, be aware of the extraneous costs of college and borrow as little as possible.
If your student is bright and talented, there is a possibility he/she might qualify for Merit Aid. Be aware that some elite colleges may not offer merit aid to all students. Merit aid might be only offered for certain majors, e.g. engineering or computer science or particular talents, e.g. music, dance, athletics.
Parents need to research those colleges offering merit aid and learn the criteria needed to quality.
Financial Aid (need-based) may be available based on the student's family situation. The formula: cost of attendance - the Expected Family Contribution = need, determines eligibility. The EFC, the result of two formulas from FAFSA and CSS Profile, is the amount a family can afford to pay each year.
Parents need to learn their EFC early and develop a strategy to make their student eligible for aid.
Student loans are both a help and a curse. Over time, the interest can add tens of thousands of dollars to the cost of college. Parents borrow from home equity, retirement plans and Parent Plus loans all adding the interest costs to the college expense.
The key is to borrow the bare minimum, search for the lowest interest rates and pay off everything as soon as possible!
529 Plans are an effective way to plan for college:
- They can be set up as a systematic deposit.
- Depending on your state, they may offer a tax credit.
- The gains are not taxed when used for qualified college expenses.
- They reduce the amount of money taken in loans.
Be $ Smart - do some homework, plan ahead, be aware of the extraneous costs of college and borrow as little as possible.
Friday, February 13, 2015
Fafsa Tips to Help Pay for College
These are a few notes I took from a recent article Gateway to College Aid by Jerilyn Klein Bier. Please pass this information along to friends and family facing college tuition payments.
The author quotes Mark Kantrowitz, co-author the of book Filing the Fafsa and publisher of Edvisors.com, a website focused on planning and paying for college. The book may be downloaded for free in PDF format at Edvisors.com.
"It is very difficult to predict how much aid a student might get from year to year."
- one big factor is the number of siblings enrolled in college,
- another factor is the price of a particular school.
Make sure assets and income are positioned before the year your student is a Junior in the spring and a senior in the fall. Fafsa works on the calendar year Jan. - Dec. not the academic year.
He urges families to file as soon as possible after January 1 as many states and schools have deadlines in early 2015 and award aid on a first-come, first-served basis.
He encourages families to file the form online because of faster processing, built-in edit checks and the skip-logic functionality. This means respondents are not asked questions that don't apply to them.
One big change for 2015 is there is little differentiation for parent relationships. Parents who live together, married or divorced, or never married are now treated as married and both must report income and assets on the Fafsa.
Grandparent owned 529 plan distributions reported as untaxed income to the beneficiary (the student) can reduce need-based aid eligibility. A parent owned 529 is treated as a parent asset and is assessed, at most, by 5.64%.
If grandparents do hold 529 plans, it's best to hold off on withdrawing assets until the student will no longer be applying for financial aid - like their senior year.
For example, a $10,000 distribution from a grandparent owned plan could reduce aid eligibility by as much as $5000, while $10,000 in a parent-owned plan could reduce eligibility by a maximum of $564.
Parents of younger children should tune in. Understanding what goes into the expected family contribution and how schools consider this can help them position their assets and steer their kids toward institutions that may offer more attractive aid. It can also help families to better balance the triple threat of saving for education, a home and retirement.
No one will give you a loan or scholarship for retirement!
Be $ smart - plan well in advance to qualify for financial aid.
The author quotes Mark Kantrowitz, co-author the of book Filing the Fafsa and publisher of Edvisors.com, a website focused on planning and paying for college. The book may be downloaded for free in PDF format at Edvisors.com.
"It is very difficult to predict how much aid a student might get from year to year."
- one big factor is the number of siblings enrolled in college,
- another factor is the price of a particular school.
Make sure assets and income are positioned before the year your student is a Junior in the spring and a senior in the fall. Fafsa works on the calendar year Jan. - Dec. not the academic year.
He urges families to file as soon as possible after January 1 as many states and schools have deadlines in early 2015 and award aid on a first-come, first-served basis.
He encourages families to file the form online because of faster processing, built-in edit checks and the skip-logic functionality. This means respondents are not asked questions that don't apply to them.
One big change for 2015 is there is little differentiation for parent relationships. Parents who live together, married or divorced, or never married are now treated as married and both must report income and assets on the Fafsa.
Grandparent owned 529 plan distributions reported as untaxed income to the beneficiary (the student) can reduce need-based aid eligibility. A parent owned 529 is treated as a parent asset and is assessed, at most, by 5.64%.
If grandparents do hold 529 plans, it's best to hold off on withdrawing assets until the student will no longer be applying for financial aid - like their senior year.
For example, a $10,000 distribution from a grandparent owned plan could reduce aid eligibility by as much as $5000, while $10,000 in a parent-owned plan could reduce eligibility by a maximum of $564.
Parents of younger children should tune in. Understanding what goes into the expected family contribution and how schools consider this can help them position their assets and steer their kids toward institutions that may offer more attractive aid. It can also help families to better balance the triple threat of saving for education, a home and retirement.
No one will give you a loan or scholarship for retirement!
Be $ smart - plan well in advance to qualify for financial aid.
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