Education Planning (6%) Flashcards
Trusts for Education
- 2503(b) (current income - Basic)—Minor or Adult, income paid annually, more than one beneficiary, assets distributed at any age. This is a gift of a future interest
- 2503(c) (minor’s trust - Complex)—Minor ONLY, dis(c)retionary distributions of Principal & Interest, Only one beneciary, assets/income to child at age 21 (normally designed to use the $14,000 annual gift tax exclusion amount). This is a gift of a present interest
- Crummey (demand—combines minor’s and current income) income available annually, assets distributed at any age
Coverdell Education Savings Account
Education IRA - tax deferred growth and tax free distributions
$2,000 contribution per bene
K-12 and college
$ used by age 30
Terms:
(a) $2,000 annual contribution per beneficiary.
(b) Taxes on earnings are deferred and distributions may be received income tax free and without penalty if used to pay tuition (funds used to pay for some college-related expenses may not be tax free).
(c) Contributions to a Coverdell Account will be considered gifts of a present interest.
(d) Private elementary and secondary school expenses can be paid tax-free from a Coverdell account. Distributions may be used for K-12 expenses for public or private schools, including tutoring, computer equipment, room and board, uniforms, and certain other expenses.
(e) Accounts may be owned by the student or the student’s parent.
(f) Money must be used by the time the beneficiary reaches age 30 (of course, beneficiaries may be changed).
(g) There are income phaseouts for contributions:
i. $95,000–$110,000 (single) and;
ii. $190,000–$220,000 for married filing jointly, (provided on exam).
What are the differences between the American Opportunity Credit and the Lifetime Learning Credit?
There are two tax credits available to persons who pay expenses for higher (postsecondary) education.
* The American Opportunity Credit, and
* The Lifetime Learning Credit
For each student you can choose only one of the credits for any one year. For example, if you choose to take the American Opportunity Credit for a child on your 2017 tax return then you cannot also claim the Lifetime Learning Credit for that same child for 2017.
If you pay qualified education expenses for more than one student in the same year, you can choose to take the American Opportunity and the Lifetime Learning Credits on a per-student, per-year basis. This means that, for example, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for another student in the same year.
* The American Opportunity Credit
- $2,500 credit per eligible student
- 40% of credit is refundable, the other 60% is nonrefundable. (refundable is treated as payments of tax you made during the year and can increase your tax refund)
- Only available for 4 years per student
- Must be pursuing a degree
- Must be enrolled at least half time
- No felony Drug convictions
- No Room and Board
_* The Lifetime Learning Credit_
- $2,000 credit per eligible student
- Nonrefundable (means credit can’t increase your tax refund or create a tax refund where you wouldn’t have had one)
- All years of post secondary ed and courses to acquire or improve job skills.
- Student does not need to be pursuing a degree
- Available for one or more courses
- Felony Drug convictions DOES NOT APPLY
- No Room and Board
American Opportunity Tax Credit (AOTC)?
- Maximum annual credit of $2,500 per student.
- 100% on first $2,000 of qualified tuition and expenses (not room and board) and 25% on next $2,000 at accredited, Title IV institution.
- Applies to taxpayer, spouse, or dependent for the first through fourth years of college, enrolled on at least a half-time basis for at least one academic period during the year.
- The AOTC may be elected for a student’s expenses for only four tax years, and only for students who have not completed the first four years of postsecondary education as of the beginning of the tax year.
- Eligible expenses are tuition, fees required for attendance or enrollment and course materials and books.
- An eligible student does not include any individual who has been convicted of any federal or state felony drug offense for possession or distribution.
- If the student pays the eligible expenses, the parent(s) who claim the child (student) as a dependent are treated as having paid the expenses, and the parent(s) must claim the credit. If the child is eligible to be claimed as a dependent, but is not claimed, only the child (student) may claim the credit.
- OK to have AOTC and tax-free Coverdell distribution in same year for same student as long as no double-dipping.
- Phaseout between $160,000 and $180,000 MFJ or $80,000–$90,000 single (for 2017—provided on exam).
- 40% of AOTC is refundable.
Lifetime Learning Credit?
- maximum annual credit of $2,000 per tax return
- 20% of qualified tuition expenses up to $10,000
- available for unlimited number of years
- available for expenses related to acquiring or improving job skills, continuing education, undergraduate, graduate, or professional degree at Accredited, Title IV institution
- Qualified higher education expenses (QHEE) are tuition and related expenses. Student-activity fees and expenses for course-related books, supplies, and equipment are included only if the fees must be paid to the institution as a condition of enrollment or attendance.
- phaseout between $112,000 and $132,000 MFJ or $56,000–$66,000 single (indexed for inflation) (provided on exam)
Coverdell Education Savings Accounts (formerly Education IRAs)?
- annual nondeductible contribution of $2,000 per beneficiary under age 18
- phaseout from $190,000 to $220,000 MFJ or $95,000 to $110,000 single (provided on exam)
- distributions not exceeding qualified education expenses are tax free
- any Coverdell account distribution may not be used to cover the same expenses for which the education credit is claimed.
- Qualified “higher” education expenses include postsecondary tuition, fees, books, and supplies. Room and board are included if the students is at least half time. These distributions may also be used to pay for K-12 expenses for public or private schools. Expenses that are covered also include tutoring, computer equipment, room and board, uniforms, special needs services, and certain other expenses. Contributions to a 529 plan are also included.
- For distributions that exceed higher education expenses, the excess is taxable once basis is proportionately recovered from the entire distribution, and the taxable portion is generally subject to a 10% penalty. Any remaining balance in a Coverdell account must be distributed when the beneficiary becomes 30 years old.
- The Coverdell may be rolled over or transferred tax free to another Coverdell account for the benefit of another family member (under age 30) of the original beneficiary.
US Savings Bonds
- Qualified U.S. savings bonds are Series EE U.S. savings bonds issued after 1989 and Series I bonds.
- Qualified higher education expenses are tuition and fees, after any scholarships, fellowships, or other tuition reduction amounts, paid to an institution of higher education. Transfer of redemption proceeds into a 529 plan may be treated as QHEE.
- Limitations on interest exemption
a. A partial exclusion is allowed where total redemption proceeds of the bonds, including principal and interest, exceed the amount of qualified higher education expenses in a tax year.
b. For 2017, the exemption is phased out as a taxpayer’s modified adjusted gross income increases from $78,150 to $93,150 (from $117,250 to $147,250 for married taxpayers filing jointly). - Gift bonds
a. bonds purchased by a parent and transferred to the child do not qualify for the exclusion
Redeemed by qualified education
Purchased by individual age 24 or older
Exclusion limited by AGI
No gift Bonds
Series EE & I are both eligible for tax benefits upon redemption if used for Qualified Education Purposes
When using bonds for your child’s education, the bonds must be registered in your name and/or your spouse’s name. Your child can be listed as a beneficiary on the bond, but not as a co-owner.
What are the types of Grants offered?
Pell Grant
Undergraduate ONLY and Needs Based ONLY
Students get this grant first and it is from the Federal Governement.
FSEOG (Federal Supplemental Education Opportunity Grant)
Undergrade ONLY and Needs Based ONLY (Prorated for part-time students)
Students get this grant after qualifying for a Pell Grant and it is Supplemental and is paid by the school
TEACH Grant
Undergraduate & Graduate
Catch is that it leads to teaching in underserved communities
What are the types of Loans offered?
Stafford Loan (From Fed Govt)
Undergraduate & Graduate
Needs Based for full-time and half-time students THEN interest is Subsidized (Undergraduate)
Non-Needs Based for full-time and half-time students THEN interest is NOT Subsidized (Undergraduate or Graduate)
Perkins Loan (From School)
Undergraduate & Graduate
Needs Based ONLY for full-time and half-time students
Parent Loans to Undergraduate Students (PLUS):
Undergraduate, Graduate and Professional Trade
NOT Needs Based
Full-time and short programs
Higher Interest Rate
What are the tax credits offered?
AOTC (American Opportunity Tax Credit)
Undergraduate ONLY (4 years)
$2,500 per student
NO DRUGS
No Room and Board Payments, Only education related costs
Lifetime Learning Credit
Undergraduate & Graduate (Unlimited # of years)
$2,000 per tax return
Acquiring or improving job skills
No Room and Board Payments, Only education related costs
