College Savings

Question 1

Coverdell ESAs

Answer 1

• $2,000 per year for each child under 18.
• Contribution is not deductible
• Must be used before age 30

Question 2

Are student loan payments allowed for Coverdell ESAs

Answer 2

No

Question 3

529 Lifetime limit per person for student loans

Answer 3

$10,000

Question 4

Coverdell qualified elementary expenses include which of the following?
I Elementary religious school room and board
II. Uniforms when required
III. To and from school transportation
IV. Extended day care programs (after school)

A. All of the above C. II, III
B. I, II, III D. None of the above

Answer 4

A

Question 5

Which of the following statements about ESA plans is true?
A. All funds must be used by the end of the final college term.
B. The funds can be held in a trust.
C. The ability of married taxpayers filing jointly to fund the ESA is phased out between $95,000 and
$110,000.
D. Expenses are limited to elementary and secondary education needs.

Answer 5

B

All funds must be used before the student reaches age 30. The phaseout for
married filing jointly is $190,000 to $220,000. Expenses can be used for
elementary or secondary education needs, but also can be used for college.

Question 6

Which of the following statements regarding ESAs is false?
A. Account gains are tax-free if the funds are used for qualified education expenses.
B. Contributions are considered to be a gift of a future interest.
C. The custodian cannot prevent the beneficiary from taking a distribution even if it is not to be used
for qualified education expenses.
D. The funds must be distributed by the time the beneficiary reaches age 30 or rolled to a new
beneficiary.

Answer 6

B Contributions are considered a gift of a present interest.

Question 7

UGMA acceptable investments

Answer 7

Cash-type investments, such as EE
bonds, Stocks, mutual funds, CDs,
savings accounts

Question 8

UTMA acceptable investments

Answer 8

Cash-type investments plus real estate or
limited partnerships

Question 9

UGMA Transferability

Answer 9

Age of maturity (18 or 21)

Question 10

UTMA Transferability

Answer 10

Up to age 25

Question 11

Mom wants to establish an account for her minor children. She does not want to incur the expenses
associated with a trust. She wants to transfer parcels of real estate into the account. Which of the
following should she use?
A. 529 account C. UTMA account E. Coverdell ESA
B. EE education account D. UGMA account

Answer 11

C

529 plans cannot be self-directed, allowing for this particular investment in real
estate. UGMAs do not permit real estate investments. Coverdell at $2,000 per year
versus $17,000 to an UTMA financially fits the answer.

Question 12

Which of the following is not a disadvantage associated with an UTMA account?
A. The kiddie tax operates until the child reaches age 18 or 24.
B. The assets pass to the child at the age of majority.
C. The assets can be invested in any investment.
D. The assets are child owned for federal aid

Answer 12

C

This could be an advantage.

Question 13

Series EE Saving Bonds

Answer 13

• Series EE or Series I bonds
• Bonds intended to fund eligible education expenses
• Purchased in parent’s name (never childs)

Question 14

Mom and Dad will set up an education account for their son, age 10. They are in the 37% tax bracket.
Which of the following strategies could they implement to pay for college tuition and books and avoid paying income tax?
A. EE education bonds C. UGMA/UTMA account
B. Deferred annuity D. Municipal bonds

Answer 14

D

Municipal bonds in a UGMA/UTMA account would produce tax-free interest. Answer
A is wrong because their tax bracket today reflects a MAGI that is higher than the
current phaseout level and presumably also will be when the bonds are cashed in.
Answer B is wrong because distributions from an annuity are partially taxed at
ordinary income tax rates (above basis) plus a 10% penalty (59½ rule). Answer C
is wrong because no type of investment is indicated.

Question 15

American Opportunity Credit

Answer 15

Taxpayers will receive a tax credit (reducing federal income tax liability $1 for $1) based on 100% of
the first $2,000 plus 25% of the next $2,000 (for a maximum credit of $2,500) of tuition, fees and course
material (not room and board). The credit may be claimed for the first four years of post-secondary
education.

Question 16

Characteristics and limitations of the American Opportunity Credit:

Answer 16

• The expenses must be for the first 4 years of post-secondary education.
• The student must take at least one-half of the normal full-time student load.
• Student may NOT have a felony drug conviction.

Question 17

Lifetime Learning Credit

Answer 17

This credit is a per-period credit rather than a per-student credit. In other words, this credit is based on qualifying expenses paid by the taxpayer for all eligible students. The credit is based on 20% of the first $10,000 of qualified tuition and related expenses (for a maximum credit of $2,000).

Question 18

Characteristics and limitations of the Lifetime Learning Credit

Answer 18

• No particular student load is required for this credit nor is the student required to be pursuing a
  degree. It can be for one or more courses to acquire or improve job skill
• Expenses incurred by the taxpayer, spouse, or a dependent qualify for this credit.
• Expenses for either undergraduate or graduate courses qualify for the credit.
• This credit can be claimed for an unlimited period as long as qualifying expenses are incurred.
• This credit is subject to MAGI phaseouts in 2023 between $160,000-180,000 (MFJ) and
  $80,000-90,000 (single). These phase out amounts are on the exam tax table and the same
  expenses-paid rules as the American Opportunity credit.
• No felony drug conviction restriction applies.

Question 19

What is not included in either the AOC or LLC

Answer 19

Room and board

Question 20

Can a taxpayer elect for both the AOC and LLC?

Answer 20

Yes, both credits can be used in the same year provided credits are not used for the same student expenses.

Question 21

Student loan interest deductions

Answer 21

• Max $2,500 deduction
• interest paid on “qualified education loans”

Question 22

Pell Grants

Answer 22

• financial aid
• $6,000 max
• Full time students
• only undergrad students

Question 23

PLUS (Parent Loan for Undergrad Students)

Answer 23

• wealthy familys
• Non-need based
• parents must be credit worthy

Question 24

Public Service Loan Forgiveness

Answer 24

Tax-free forgiveness may be achieved by working for at least 10 years in qualifying fields, such as
firefighting, teaching, military, government and nursing.

Question 25

A couple with a MAGI of $90,000 wants to know which combination of techniques can be used to pay
annual education costs for their daughter in her first year of college.
A. The American Opportunity Credit, a $20,000 tuition gift from a grandparent, and a Pell Grant
B. A Lifetime Learning Credit, a Coverdell ESA distribution, and a UTMA distribution
C. A Coverdell ESA distribution, a $20,000 tuition gift from a grandparent, and the American
Opportunity Credit
D. The American Opportunity Credit, a $20,000 tuition gift from a grandparent, and an UTMA account
distribution for room and board

Answer 25

D

Pell Grants are limited to families with MAGIs under $60,000 (our estimate).
Expenses paid with grants or scholarships also do not qualify for these credits. Do not select any combination of the American Opportunity Credit, Lifetime, Coverdell ESA withdrawal, or qualified tuition distribution in any one year due to the coordination rules. When the question only indicates one expense (tuition), only use one of the four programs as an answer.

Question 26

Holly, the daughter of Mr. and Mrs. Golightly, plans to get her master’s degree at a state. Her parents,
both professionals, earn well over $150,000 each, but spend almost all they make. Which of the
following may generate federal income tax credits for undergraduate as well as graduate education?
A. American Opportunity Credit
B. Lifetime Learning Credit
C. Coverdell (ESA)
D. PLUS
E. None of the above

Answer 26

E

The American Opportunity Credit is not available for the graduate years. The
Lifetime Learning is subject to phaseout. The Coverdell and PLUS do not generate
federal income tax credits.

Question 27

Barry Bush, who lives in California, is concerned about his son. The son, Brian, a freshman in high
school, shows no signs of wanting a college education. Barry and his father attended Yale. Barry and
his father would like to fund for that possibility. Which of the following do you suggest if Brian is an
only child?
A. Contribute the maximum allowable under gift tax laws to an UGMA/UTMA
B. Wait and take out a PLUS
C. Contribute the maximum allowable under gift tax laws to a 529 savings plan
D. Contribute the maximum allowable under gift tax laws to a 529 prepaid tuition plan

Answer 27

C

At age of majority, Brian can withdraw the assets in the UGMA/UTMA for personal
use. Answer C is better than Answer D, because the funds will be for an Ivy League
school (Yale) and not a state school. Funds will also be needed for room and
board

Question 28

Can you claim the AOC and LLC in the same year as Coverdell ESA distributions?

Answer 28

No

The American Opportunity Credit or the Lifetime Learning Credit cannot currently be claimed (on the
same dollars) in a tax year in which distributions from a Coverdell ESA on behalf of the same student
are excluded from income. The taxpayer may claim an American Opportunity Credit or Lifetime
Learning Credit for the same taxable year as amounts distributed from a Coverdell ESA as long as there
are sufficient qualified education expenses to cover both.