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CFP Exam - BIF Exam Prep > BU - Education Funding > Flashcards

BU - Education Funding Flashcards

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1
Q

What is a 529 Plan?

A

A program that allows taxpayers to either prepay or contribute to an account that will pay a student’s qualified education expenses at an eligible educational institution.

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2
Q

Are distributions tax-free?

A

Yes, if they are made towards qualified education expenses

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3
Q

Who can have a 529 plan?

A

Any beneficiary who is under the age 18 or is a special needs beneficiary

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4
Q

Who can contribute to a section 529?

A

anyone, there is no income restrictions on individual contributors & can contribute to both a 529 and Coverdell ESA

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5
Q

What is a Coverdell ESA

A

A savings account is set up to pay the qualified education expenses of a designated beneficiary

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6
Q

Who can have a Coverdell ESA?

A

Any beneficiary who is under the age 18 or is special needs

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7
Q

Who can contribute to a Coverdell ESA

A

Generally anyone - including the beneficiary - whose MAGI for the year is less than $110K (check tax tables for phaseout)

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8
Q

Are distributions tax free?

A

Yes if the distribution are not more than the beneficiary’s adjusted qualified education expenses for the year

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9
Q

How are federal taxes treated for 529s & Coverdell ESA?

A

Non deductible contributions
qualifying educational expenses are excluded from income
529 and Coverdell can be used for higher education
Coverdell can also be used for K-12 expenses

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10
Q

How are federal gift tax treated with 529s & Coverdell ESA?

A

Both are treated as completed gifts up to $16000 annually
529’s can do a 5 year super funding

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11
Q

How are contributions to 529s and Coverdell ESAs treated for Estate taxes?

A

Contributions are removed from the donor’s estate,
529 exception: partially included for death during 5 year super funding period

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12
Q

Maximum Investment into 529s and Coverdell ESA

A

529 - established by the program, many in excess of $400k per beneficiary
Coverdell - $2000 per beneficiary per year - combined from all sources

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13
Q

Qualified expenses for 529 & Coverdell

A

529 - college tuition, fees, books, computers and related equipment, supplies, special needs, room & board for max 1/2 students. Up to $10k in tuition expenses for K-12 schools. Up to $10k in student loan payments

ESA - Tuition, fees, supplies, equipment, special needs, room & board for min 1/2 students, add’l types of K-12 expenses

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14
Q

What are the age and time restrictions on 529 and ESA?

A

529 - no restrictions unless imposed by the programs
ESA - contributions before age 18 and use by age 30

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15
Q

Income restrictions on 529 and ESAs

A

529 - none

ESA - Contribution phaseout - looks at tax sheet

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16
Q

Federal Financial Aid impacts from 529 and ESAs

A

529 & ESA - counts as an asset of parent if owner is parent or dependent student

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17
Q

Penalties on 529 an ESA withdraws not used for qualifying expenses

A

10% penalty and earnings are subject to federal tax

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18
Q

What is UGMA & UTMA?

A

a custodial account for the benefit of a minor which the minor owns securities

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19
Q

Who can have a UGMA & UTMA?

A

The minor named as the beneficiary on the account

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20
Q

Who can contribute to a UGMA/UTMA?

A

Anyone can contribute, no contribution limits
Kiddie tax rules may applies to unearned income

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21
Q

Are distributions from UGMA/UTMA tax free?

A

No

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22
Q

What is a Series EE/Series I bond?

A

special savings bond through which an exclusion from taxation on interest is available when used for qualifying education expenses

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23
Q

Who can have Series EE bonds

A

the bond must be issued either in one parent’s name or both parent and spouse

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24
Q

Who can purchase a Series EE?

A

The purchaser/owner must be at least 24 years old before the bond’s issue date

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25
Q

Are distributions tax free?

A

When used for qualifying education expenses
Owner’s MAGI is below certain limits
interests from bonds are tax free

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26
Q

How are Series EE and UGMA/UTMA federally taxed?

A

Series EE - taxed deferred federally, tax free for state, certain post 1989 series bonds may be redeemed federal tax free for qualified education expenses

UGMA/UTMA - earnings and gains taxed to minor, first $1150 of unearned income is tax exempt, unearned income over $2300 for certain children under age 24 is taxed at their parent’s highest tax rate

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27
Q

Do Series EE and UGMA/UTMA get gift tax treatment?

A

Series EE - no gift as the bond must be owned by parent

UGMA/UTMA - can gift up to the annual exclusion

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28
Q

What is the estate tax treatment for Series EE and UGMA/UTMA?

A

Series EE - included in owner’s gross estate

UGMA/UTMA - valued removed from donor’s gross estate unless donor remains custodian

29
Q

Qualifying expenses for Series EE and UGMA/UTMA

A

Series EE - tuition and fees

UGMA/UTMA - funds can be used for any purpose

30
Q

Are you able to change beneficiaries on Series EE or UGMA/UTMA

A

Series EE - n/a because it is owned by the parent

UGMA/UTMA - no because it is an irrevocable gifts

31
Q

Age and time restrictions on Series EE and UGMA/UTMA

A

Series EE - bond purchaser has to be 24 yr old at time of bond issuance

UGMA/UTMA - custodianship terminates when minor reaches 18

32
Q

Income restrictions on Series EE and UGMA/UTMA

A

Series EE - interest exclusion phases out for incomes between 128,650 and 158,650 joint

UGMA/UTMA - no restrictions

33
Q

How does Series EE and UGMA/UTMA impact financial aid?

A

Series EE - counted as asset of bond owner

UGMA/UTMA - counted as student’s assets

34
Q

What kind of investments are in Series EE and UGMA/UTMA?

A

Series EE - interest earning bond back by full faith and credit of US

UGMA/UTMA - as permitted under state laws

35
Q

What are the penalties for using funds from Series EE and UGMA/UTMA on non qualifying expenses?

A

Series EE - no penalty, interest will be included in federal income

UGMA/UTMA - not applicable

36
Q

How do you calculate the amount of interest from a bond that is tax free?

A
  1. $ of qualified education expenses / total proceeds
  2. multiply that by the amount of interest earned from the bond
  3. equals the $ that is tax free interest, the remaining difference is taxed
37
Q

Financial Aid Alternatives

A

Home Equity Loans
Life Insurance Cash Values
Qualified Plans - ER plans may allow to borrow for education
Defer Admission - some colleges allow student to attend and defer admission while the student works and lives at home
Community College

38
Q

What is the penalty if you withdraw from a traditional IRA for qualified education expenses?

A

no penalty, only taxed as ordinary income

39
Q

529 ABLE Plans

A

tax-favored savings account that accept contributions for an eligible individual with a disability or blind.
established if blindness or disability occurs before age 26
beneficiary only allowed 1 accounts
earnings are not taxed if used for qualified disability expenses
contributions are not tax deductible and must be cash or cash equivalent

40
Q

How does 529 ABLE Plans impact federal income tax?

A

non-deductible
withdrawn earnings excluded from income to extent of qualified disability expenses

41
Q

what is the federal gift tax treatment on 529 ABLE Plans?

A

contributions can be treated as gifts up to the exclusion amount

42
Q

How are estate taxes treated with 529 ABLE Plans?

A

Upon the death of the beneficiary, the ABLE balance is included in the gross estate.
amounts paid from the account for outstanding qualified disability expenses and state for claims under its medicaid plan may be deductible

43
Q

What is the max investment in 529 ABLE Plans?

A

Subject to state limits
many in excess of $400k
only the first $100k is exempt from SSI $2000 limit

44
Q

Are you able to change the beneficiary of a 529 ABLE plan?

A

No, the beneficiary is the owner of the account

45
Q

Time and age restrictions on 529 ABLE Plans…

A

must be diagnosed with a significant disability before age 26
with a condition expected to last at least 2 consecutive months
must also be receiving benefits under SSI and/or SSDI
or able to obtain a disability certification from a doctor

46
Q

How does 529 ABLE impact financial aid?

A

account balances of $100k or less are disregarded and not reported as an asset on a sibling’s FAFSA

47
Q

Impact on using 529 ABLE funds for non-qualifying expenses…

A

will result in tax implications and penalties and could affect the beneficiary’s eligibility for public benefits

48
Q

4 Types of Student Aid

A

Grants
Scholarships
Loans
Work Study

49
Q

Types of Grants

A

Pell Grants - awarded to students with exceptional financial aid and who have not earned a bachelor’s graduate or professional degree

Federal Supplemental Educational Opportunity Grant (FSEOG) - for undergraduates with expectational needs and gives priority to students who receive the Pell Grants - FSEOG doesn’t have to be paid back

50
Q

Types of Student Loans

A

Federal Direct/Stafford Loans

  • Direct Subsidized loans - need-based and undergrad only, slightly better terms, US Dept of Ed pays the interest on loan while student is at least 1/2 in schools, the first 6 months after school and during a period of deferment
  • Direct Unsubsidized loans - not need based, undergrad, grad and professional students. Students are responsible for paying the interest on the loan during all periods

Direct PLUS/PLUS Loan

  • not need based, undergrad, grad and professional students
  • loan can be made to parent (Parent PLUS loan)
  • loans made to grad or professional students are called grad PLUS loans
  • US Dept of Ed is the lender
  • Cannot have an adverse credit history
  • Max loan = cost of attendance - any other financial aid received (including workstudy)
51
Q

FAFSA

A

Free Application for Federal Student Aid

2-year lookback for reported income

52
Q

EFC

A

Expected Family Contribution

computed based on the financial resources of parent and student

Includes: Income (Parent and Student) + Assets (Parent and Student)

53
Q

What income is included in the EFC calculations

A

Parent’s AGI - an allowance for taxes and living expenses

Student’s amount over “protected amount” ($7040 for 22-23 academic year)

54
Q

What assets are included in the EFC calculations?

A

Cash, savings, checking account, money market funds and CDs

Investments (like brokerage accounts)

Rental real estate equity, businesses, investment farms, and trust funds

College savings plans, CESAs & 529s

55
Q

EFC Formula

A

Income + Assets

Income is 22%-47% of Parent’s and 50% of Students

Assets is 5.64% of Parent’s and 20% of Students

Assets: checking accounts, brokerage accounts, 529s, UTMA/UGMA etc.

56
Q

American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): Max Benefits

A

AOTC: up to $2500 credit per eligible student (100% of the first $2000 +25% of remaining)

LLC: up to $2000 credit per return (20% of the first $10k)

57
Q

American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): Refundable or nonrefundable

A

AOTC: 40% of credit is refundable (up to 1000)

LLC: not refundable

58
Q

American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): MAGI Limits

A

Yes, check tables

Can not file MFS

59
Q

American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): Number of years available

A

AOTC: first 4 years of post secondary education before 2022 (undergrad only)

LLC: all years of post secondary education and for courses to acquire or improve job skills

60
Q

American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): Attendance requirement

A

AOTC: must be at least ½ time for at least one academic period

LLC: available for one or more courses

61
Q

American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): Felony Drug Conviction

A

AOTC: student must have no felony drug convictions starting in 2022

LLC: not applicable

62
Q

American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): Qualified expenses

A

AOTC: tuition, required enrollment fees, and materials needed for the course of study

LLC: tuition and fess required for enrollment or attendance only

63
Q

Calculating Education Funding for Day 1 of college

A

Use current tuition, education %, FV and number of years until college

64
Q

Calculating total cost of attendance

A

BEG: Tuition cost FV, inflated adjusted rate, number of years in college, solve for PV

65
Q

Calculating amount needed TODAY to cover full cost

A

Is it asking lump sum or payment? Monthly or annual contributions? Or one-time amount? Use investment %, and solve for PV or PMT

66
Q

Maximum investment for Series EE & I Bonds

A

Series EE: $10k per year, per owner

Series I: $10k digital, $5k paper per year, per owner

67
Q

How much student loan interest is deductible

A

Individuals and couples may deduct interest payments on student loans of up to $2,500 for 2022. There is a phaseout for MFJ of $145,000 - $175,000.

68
Q

Distributions that are added back as income on the student’s financial aid application…

A

Withdrawals from student owned Coverdell ESA and ROTH IRAs are considered incom

CFP Exam - BIF Exam Prep (17 decks)

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