College Savings Hell Flashcards
College Savings and Related Tax
3 Key steps for developing education funding plan
- Identify future value (FV) of tuition
- Determine amount of capital needed to fund years in college
- Solve for FV of assets already accumulated
- Solve for additional amount needed
What does EFC stand for and what does it do (2 things)?
Expected Family Contribution
- It measures family financial strength
- It’s used to determine eligibility for federal student aid
What makes up the EFC?
Amount of funds the family AND student is expected to contribute to student’s education
Cost of Attendance - EFC = Fin. Need
Best education funding techniques ever (4)
- Section 529 Plans
- UGMA/UTMA
- PLUS Loans
- Scholarships
4 types of Financial Aid
- Grants
- Loans
- Scholarships
- Federal Work Study Programs
What form do you fill out to determine who is eligible for financial aid (for education)?
FAFSA
Eligible Education Institution (according to the IRS)
Any college, university, vocational school, or other post-secondary school eligible to participate in Student Aid by US Dept. of Education
What are “Qualified Tuition Plans?”
They let families save for education expenses on a tax deferred basis
(aka 529 or pre-paid tuition)
How does Pre-Paid tuition work? And what are the benefits/costs?
Parents purchase college credits today and use those credits for child’s college down the line.
- Tuition only
- Not today’s cost (often a premium charged)
- No income tax consequences
- Not popular (only 10 states)
What are College Savings Plans AKA 529 Savings Plans?
College saving on a tax-deferred basis with attendance at ANY eligible education institution
529 Savings Plans benefits (6 big things)
- Fed & State income tax free
- Can be applied to tuition/fees, books, supplies, and equipment
- Room and board for students enrolled half time or more
- Often state income tax deduction
- No income limitations
- Can go to any institution regardless of state
Qualified expenses for 529A Plans (ABLE)
(5 things)
- Education
- Job training
- Support
- Healthcare
- Financial management
Some common exceptions to the 10% tax penalty for withdrawing from 529 plan for non-qualified expenses:
- Death of beneficiary.
- Disability of beneficiary.
- Beneficiary got a tax free scholarship.
- Beneficiary got veteran’s educational assistance.
- Beneficiary is attending US Military Academy and distribution is not in excess of cost of attendance.
(There are more!)
How does a Private College 529 Plan work?
Qualified Tuition Plan
Parents pre-pay tuition credits to 1 of 300 private universities across the country
Very similar to pre-paid tuition plans
Explain the Uniform Transfer to Minors Act (UTMA)
Allows minors to own (1)cash, (2)securities, and (3)real estate
(Upon reaching 18 or 21, child can access account without permission of custodian)
Explain the Uniform Gift to Minors Act (UGMA)
Allows minors to own cash or securities
(Upon reaching 18 or 21, child can access account without permission of custodian)
What are the 2 main disadvantages of UTMA & UGMA?
- Child can use funds for literally anything
- They are subject to the Kiddie Tax
Explain how the Kiddie Tax works
Unearned income in excess of an annually indexed amount may be taxed at rates as high as 37%
Who does the Kiddie Tax apply to?
Beneficiaries under 19 and dependent full-time students under the age of 24
The recipient of a scholarship prize is considered a candidate for a degree if (2 things)
The Recipient is:
- Attending a primary/secondary school or pursuing a degree at a college/university.
- Attending an accredited educational institution.
What are the requirements for a scholarship prize(s) to NOT be included in taxable income (2 things)
The Recipient is:
- A candidate for a degree at an eligible school
- Candidate uses the proceeds to pay for qualified educational expenses
Expenses that do not qualify as qualified educational expenses for the purpose of tax free scholarships
- Room and Board
- Transportation Expenses
- Equipment and other fees nor required for attendance
How many Pell Grants can a student receive a year?
1
Are Pell Grants consistent in funding amount year to year?
No
The maximum Pell Grant award is limited to an a indexed amount that may fund up to b% to c% of average annual d and e for in state public schools
a. annually
b. 25
c. 50
d. tuition
e. fees
How does the Lifetime Learning Credit work? (3 main things)
-Claim a credit for 20% of first $10,000 of qualifying tuition and fees ($2,000 per family)
-For improving/upgrading job skills
-Adjusted Gross Income phase out
How does the American Opportunity Tax Credit work? (4 things)
-1st 4 years of undergrad
-Credit is 100% of qualified expenses up to $2,000 plus 25% of next $2,000 (25% of 2k is 500)
-Essentially $2500 per student
-Adjusted Gross Income phase out
How do Stafford Loans work?
(4 things)
- Direct loans (payed directly to school)
- Have maximum limits
- Fixed interest rates
- Student must AT LEAST be half time
How do Unsubsidized Stafford Loans work? (3 things)
-Accrue interest the date loan is disbursed
-Student may defer payment while in school
-All students are eligible (not needs based)
How do Subsidized Stafford Loans work? (4 things)
-Lower interest rate
-Gov pays interest while student is in school
-Interest starts to accrue 6 months after student leaves school
-Based on financial need
Coverdell Education Savings Account (ESA)
Tax Deferred trust or custodial account to pay for qualified expenses for
-higher education
-elementary school
-secondary school
Qualified expenses for Coverdell ESA (higher education)
6 things
-Tuition
-Fees
-Books
-Tutoring
-Computer related expenses
-Room/Board
Qualified expenses for Coverdell ESA (elementary and high school)
11 things
-Tuition
-Fees
-Books
-Supplies
-Equipment
-Tutoring
-Computer related expenses
-Special needs services
-Room/Board
-Uniforms
-Transportation
What is the Coverdell ESA contribution limit?
$2,000 per beneficiary per year
List the Coverdell ESA exceptions to 10% tax penalty for withdrawing for non-qualified expenses
(6 things)
Distribution is due to
-Death of beneficiary
-Disability of beneficiary
-Tax Free Scholarship
-Veteran’s educational assistance
-Employer-provided assistance
-Distribution is included in income because American Opportunity Act & Lifetime Learning Credits
How does the Employer Provided Education Assistance Program work?
Employer reimburses employees for education expenses up to $5,250 (2021)
Can reimburse over $5,250 but everything over that amount is taxed
Employer provided education assistance covers 5 things:
-Tuition
-Fees
-Books
-Supplies
-Equipment
Home Equity Loans for funding education… How does it work? (3 things)
-Parents must meet debt to income ration requirements
-Payments on debt start immediately
-Home is collateral
401k loans for funding education… How does it work? (5 things)
-Loans up to $50,000 or half of vested account balance
-Must be repaid (w/ interest) in 5 years
-Does not affect need based aid
-Not taxable; no 10% penalty
- If separation from employer, must be fully repaid immediately
What are the qualified educational expenses of US government Series EE & I Bonds
Tuition and Fees only
True or False
Beneficiary of Coverdell ESA can have multiple accounts and can hit the contribution limit on each one
FALSE; Beneficiary can have multiple accounts but can’t exceed limit on total
True or False
Funds inside Roth IRA are not countable assets for financial aid calculation purposes, so it’s a good idea to use this as a means to pay for education
FALSE; IRA funds are not countable assets for financial aid, but distributions are reported as untaxed income on FASFA and can impact need- based financial aid
True or False
Student assets have a greater impact on financial aid
TRUE
True or False
Assets and Income are considered equally in determining financial aid
FALSE; income is a much bigger factor than assets
True or False
If a scholarship or fellowship is intended to compensate the recipient for past, present, or future services, such as teaching or research, then the shcolarship/fellowship is included in taxable income
TRUE
True or False
Prepaid tuition credits are assets of the parent
TRUE
True or False
Coverdell ESA contributions and earnings are deductible for federal and state income taxes
FALSE; neither are deductible at all
True or False
Only one spouse can contribute up to the contribution limit of a 529 Savings Plan
FALSE: Both spouses can reach the contribution limit each, essentially doubling the contribution limit
True or False
If a donor makes a gift of $75k in 2021 and chooses front loading to avoid gift taxes, but dies before the full 5 years have passed, a portion of the gift will be brought back to donor’s gross estate
TRUE; Once a donor dies, leftover money that hasn’t been ratably disbursed goes back to estate for federal estate tax purposes
True or False
Uncle Joe can contribute up to 5 times the annual gift tax exclusion into Nephew Max’s 529 College Savings Plan
True
True or False
College Savings Plans (529s) are considered assets of beneficiary
FALSE; They are assets of the parent
True or False
It is an advantage for a 529 Plan to be owned by a 3rd party instead of parents
FALSE; Qualified Distributions are treated as untaxed income to child by FASFA and can hinder future financial aid.
True or False
States will provide additional benefits to 529 Plans when it comes to higher education saving/planning
Mostly true but FALSE;
Only some states provide the following:
- state income tax deductions to savings plans
- merit based scholarships to state schools
