BU - Education Funding Flashcards
What is a 529 Plan?
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.
Are distributions tax-free?
Yes, if they are made towards qualified education expenses
Who can have a 529 plan?
Any beneficiary who is under the age 18 or is a special needs beneficiary
Who can contribute to a section 529?
anyone, there is no income restrictions on individual contributors & can contribute to both a 529 and Coverdell ESA
What is a Coverdell ESA
A savings account is set up to pay the qualified education expenses of a designated beneficiary
Who can have a Coverdell ESA?
Any beneficiary who is under the age 18 or is special needs
Who can contribute to a Coverdell ESA
Generally anyone - including the beneficiary - whose MAGI for the year is less than $110K (check tax tables for phaseout)
Are distributions tax free?
Yes if the distribution are not more than the beneficiary’s adjusted qualified education expenses for the year
How are federal taxes treated for 529s & Coverdell ESA?
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
How are federal gift tax treated with 529s & Coverdell ESA?
Both are treated as completed gifts up to $16000 annually
529’s can do a 5 year super funding
How are contributions to 529s and Coverdell ESAs treated for Estate taxes?
Contributions are removed from the donor’s estate,
529 exception: partially included for death during 5 year super funding period
Maximum Investment into 529s and Coverdell ESA
529 - established by the program, many in excess of $400k per beneficiary
Coverdell - $2000 per beneficiary per year - combined from all sources
Qualified expenses for 529 & Coverdell
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
What are the age and time restrictions on 529 and ESA?
529 - no restrictions unless imposed by the programs
ESA - contributions before age 18 and use by age 30
Income restrictions on 529 and ESAs
529 - none
ESA - Contribution phaseout - looks at tax sheet
Federal Financial Aid impacts from 529 and ESAs
529 & ESA - counts as an asset of parent if owner is parent or dependent student
Penalties on 529 an ESA withdraws not used for qualifying expenses
10% penalty and earnings are subject to federal tax
What is UGMA & UTMA?
a custodial account for the benefit of a minor which the minor owns securities
Who can have a UGMA & UTMA?
The minor named as the beneficiary on the account
Who can contribute to a UGMA/UTMA?
Anyone can contribute, no contribution limits
Kiddie tax rules may applies to unearned income
Are distributions from UGMA/UTMA tax free?
No
What is a Series EE/Series I bond?
special savings bond through which an exclusion from taxation on interest is available when used for qualifying education expenses
Who can have Series EE bonds
the bond must be issued either in one parent’s name or both parent and spouse
Who can purchase a Series EE?
The purchaser/owner must be at least 24 years old before the bond’s issue date
Are distributions tax free?
When used for qualifying education expenses
Owner’s MAGI is below certain limits
interests from bonds are tax free
How are Series EE and UGMA/UTMA federally taxed?
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
Do Series EE and UGMA/UTMA get gift tax treatment?
Series EE - no gift as the bond must be owned by parent
UGMA/UTMA - can gift up to the annual exclusion
What is the estate tax treatment for Series EE and UGMA/UTMA?
Series EE - included in owner’s gross estate
UGMA/UTMA - valued removed from donor’s gross estate unless donor remains custodian
Qualifying expenses for Series EE and UGMA/UTMA
Series EE - tuition and fees
UGMA/UTMA - funds can be used for any purpose
Are you able to change beneficiaries on Series EE or UGMA/UTMA
Series EE - n/a because it is owned by the parent
UGMA/UTMA - no because it is an irrevocable gifts
Age and time restrictions on Series EE and UGMA/UTMA
Series EE - bond purchaser has to be 24 yr old at time of bond issuance
UGMA/UTMA - custodianship terminates when minor reaches 18
Income restrictions on Series EE and UGMA/UTMA
Series EE - interest exclusion phases out for incomes between 128,650 and 158,650 joint
UGMA/UTMA - no restrictions
How does Series EE and UGMA/UTMA impact financial aid?
Series EE - counted as asset of bond owner
UGMA/UTMA - counted as student’s assets
What kind of investments are in Series EE and UGMA/UTMA?
Series EE - interest earning bond back by full faith and credit of US
UGMA/UTMA - as permitted under state laws
What are the penalties for using funds from Series EE and UGMA/UTMA on non qualifying expenses?
Series EE - no penalty, interest will be included in federal income
UGMA/UTMA - not applicable
How do you calculate the amount of interest from a bond that is tax free?
- $ of qualified education expenses / total proceeds
- multiply that by the amount of interest earned from the bond
- equals the $ that is tax free interest, the remaining difference is taxed
Financial Aid Alternatives
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
What is the penalty if you withdraw from a traditional IRA for qualified education expenses?
no penalty, only taxed as ordinary income
529 ABLE Plans
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
How does 529 ABLE Plans impact federal income tax?
non-deductible
withdrawn earnings excluded from income to extent of qualified disability expenses
what is the federal gift tax treatment on 529 ABLE Plans?
contributions can be treated as gifts up to the exclusion amount
How are estate taxes treated with 529 ABLE Plans?
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
What is the max investment in 529 ABLE Plans?
Subject to state limits
many in excess of $400k
only the first $100k is exempt from SSI $2000 limit
Are you able to change the beneficiary of a 529 ABLE plan?
No, the beneficiary is the owner of the account
Time and age restrictions on 529 ABLE Plans…
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
How does 529 ABLE impact financial aid?
account balances of $100k or less are disregarded and not reported as an asset on a sibling’s FAFSA
Impact on using 529 ABLE funds for non-qualifying expenses…
will result in tax implications and penalties and could affect the beneficiary’s eligibility for public benefits
4 Types of Student Aid
Grants
Scholarships
Loans
Work Study
Types of Grants
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
Types of Student Loans
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)
FAFSA
Free Application for Federal Student Aid
2-year lookback for reported income
EFC
Expected Family Contribution
computed based on the financial resources of parent and student
Includes: Income (Parent and Student) + Assets (Parent and Student)
What income is included in the EFC calculations
Parent’s AGI - an allowance for taxes and living expenses
Student’s amount over “protected amount” ($7040 for 22-23 academic year)
What assets are included in the EFC calculations?
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
EFC Formula
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.
American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): Max Benefits
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)
American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): Refundable or nonrefundable
AOTC: 40% of credit is refundable (up to 1000)
LLC: not refundable
American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): MAGI Limits
Yes, check tables
Can not file MFS
American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): Number of years available
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
American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): Attendance requirement
AOTC: must be at least ½ time for at least one academic period
LLC: available for one or more courses
American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): Felony Drug Conviction
AOTC: student must have no felony drug convictions starting in 2022
LLC: not applicable
American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC): Qualified expenses
AOTC: tuition, required enrollment fees, and materials needed for the course of study
LLC: tuition and fess required for enrollment or attendance only
Calculating Education Funding for Day 1 of college
Use current tuition, education %, FV and number of years until college
Calculating total cost of attendance
BEG: Tuition cost FV, inflated adjusted rate, number of years in college, solve for PV
Calculating amount needed TODAY to cover full cost
Is it asking lump sum or payment? Monthly or annual contributions? Or one-time amount? Use investment %, and solve for PV or PMT
Maximum investment for Series EE & I Bonds
Series EE: $10k per year, per owner
Series I: $10k digital, $5k paper per year, per owner
How much student loan interest is deductible
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.
Distributions that are added back as income on the student’s financial aid application…
Withdrawals from student owned Coverdell ESA and ROTH IRAs are considered incom
