03 - Education Planning Flashcards
What is the steps to calculate the dollar amount needed to meet the education goals of the client?
Three-Step Method:
i. Step 1: Determine the cost of the first year of college. You should use the current cost of education and inflate the amount using the rate for education inflation.
ii. Step 2: Determine the present value of the total cost of college the year the child begins school. You will need to know how many years the child will be in school (i.e., how many payments the parents will make)
iii. Step 3: Determine the necessary savings
When calculating the savings required for when a client’s child begins college, will you need to calculate an ordinary annuity or an annuity due?
If you are trying to calculate the savings required for when a client’s child begins college, you need to calculate an annuity due (as opposed to an ordinary annuity).
What is the mnemonic and order of steps for using the given rates?
Financial Planners Tell Clients: Expect Better Returns
ii. F – First Cost
iii. P – PV of
iv. T – Total Cost
v. C – Current cost (savings required now)
vi. E – Education rate
vii. B – Both rates
viii. R – Rate of Return
If the Present Value is less than the number of years in college times the first-year cost, what does this indicate?
If the expected return is greater than the escalation rate of education cost, the PV in Step 2 will always be less than N (number of years in college) times the PMT (first-year cost); this is a good double check on your TVM calculation
Are Qualified Tuition Programs and the 529 Plan considered an asset of the parent or the child?
QTPs/529 plans (and ESAs) are considered an asset of the parent and are figured into the Expected Family Contribution (EFC) for financial aid purposes
What are the two basic types of 529 plans?
There are two basic types of 529 plans:
i. Prepaid tuition plans
ii. Savings plans
Are there federal or state tax deductions allowed for contributions to a QTP?
No federal tax deduction is allowed for contributions to QTPs, but there is a potential state tax deduction for those who live in certain states and contribute to that state’s plan.
If there is not a federal tax deduction (potentially a state tax deduction for certain states), then what is the benefit of a 529 plan?
All growth investments within the 529 plan is tax-free when distributions are used for qualified education expenses
What entities can offer a prepaid or savings Qualified Tuition Program?
States can offer one or both plans (prepaid or savings), but educational institutions can offer only the prepaid type
What is the maximum an individual or couple may contribute to Qualified Tuition Programs in a single year without gift tax consequences?
An individual may contribute up to $70,000 in a single year – 5 x $14,000 (i.e., the annual exclusion) with no gift tax consequence. A couple may contribute $140,000 annually (gift splitting).
Is the “cost of the purchase of any computer technology or equipment or Internet access and related services” considered qualified expenses under any of the Qualified Tuition Programs?
The “cost of the purchase of any computer technology or equipment or Internet access and related services” are generally not considered qualified expenses under the American Opportunity Credit or Lifelong Learning Credit, or the tuition and fees deduction, but they are for 529 plan (and Coverdell ESA) withdrawals
What expenses are considered “qualified education expenses” under a 529 plan?
529 plan “qualified education expense” include:
i. Tuition
ii. Fees
iii. Books
iv. Room and Board (at least half-time enrolled)
v. Equipment and special needs services
vi. Computer technology or equipment (including related tech, such as internet) so long as the computer software is used for educational purposes and the printer and other tech that is controlled by a central processing unit. (Note: This does not include equipment used primarily for entertainment)
Are a student or a student’s parents still eligible to claim the American Opportunity Tax Credit or Lifelong Learning Credit, even if using money from a 529 plan?
A student or student’s parents may still be eligible to claim the American Opportunity Tax Credit or Lifelong Learning Credit, even if using money from a 529 plan
When calculating Qualified Taxable Distributions, what must be subtracted out, if necessary?
When calculating Qualified Taxable Distributions, remember to subtract out any tax-free educational assistance from other sources (i.e., scholarships, grants, etc.)
What are the steps to calculate if distributions from a Qualified Tuition Program are taxable?
To calculate if distributions are taxable:
i. Determine the source of funds
ii. Remove any tax-free assistance
iii. Figure the adjusted qualified education expenses (AQEE)
iv. Calculate taxable earnings = (AQEE/Distributions) x Earnings
Can a taxpayer claim both an American Opportunity or Lifelong Learning Credit in the same year the beneficiary takes a tax-free distribution from a QTP?
An American opportunity or lifetime learning credit [described in greater detail in the “Financial Aid” lesson] can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses aren’t used for both benefits. This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit
Generally, on a taxable distribution (i.e., not used for qualified educational expenses), what are the exceptions to paying the 10% additional tax?
The 10% additional tax doesn’t apply when you “ADD A Credit”
- A – Assistance (scholarship, grant, etc.)
- D – Death
- D – Disability
- A – Academy (Military institution)
- C – Credit (AOTC or Lifetime Learning Credit)
Can a distributed amount be rolled over to another QTP to avoid penalties?
An amount is rolled over if it is back in another QTP within 60 days after the date of distribution
Are there income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary’s family?
There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary’s family.
What plans work for education planning for K-12 private schools?
m. When the exam refers to education planning for K-12 private school, remember ESAs work; 529 plans do not
What is a Coverdell ESA?
A savings account that is set up to pay the qualified education expenses of a designated beneficiary
Where can a Coverdell ESA be established?
At any bank or other IRS-approved entity that offers Coverdell ESAs
Who can have a Coverdell ESA?
Any beneficiary who is under age 18 or is a special needs beneficiary
Who can contribute to a Coverdell ESA?
Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return)
