General Financial Planning Principles Sections 6 Flashcards
The American Opportunity Tax Credit helps families pay for post secondary education, how is the credit applied and what are the limits?
It reduces the family’s tax dollar for dollar for the 100% of the first $2,000 of qualified expenses paid in the tax year, plus 25% of the next $2,000.
What is the possible maximum credit given for the American Opportunity Tax Credit and how would one get it?
The maximum credit allowed is $2,500 per student but the student would need to have $4,000 in qualifying expenses
Is room and board a qualifying expense for the American Opportunity Credit?
No
How much credit can one get using the Lifetime Learning Credit?
20% on the first $10,000 on qualifying expenses which means the max is $2,000.
The Lifetime Learning Credit is available per______ whereas the American Opportunity credit is available per______.
Family / Student
Is there a degree program or halftime enrollment status needed to qualify for the American Opportunity Credit or Lifetime Learning Credit?
Yes for American and no for the Lifetime which can be used for unlimited amount of years
In coordination of the American Opportunity Tax Credit and the Lifetime Learning Tax Credit, if two or more children in the same household incur qualified expenses in the same year what are their options for using the above credits listed?
a) They can used the Lifetime Learning Credit for the family; or
b) used the American Opportunity Tax Credit for each child; or
c) use the Lifetime Learning Credit for one child and an American Opportunity Tax Credit for the other child
Note: Only one credit is allowed per child per year; in other words, both credits can not both be claimed in the same year for the same student
What are the two types of Section 529s?
Prepaid Tuition Plans and College Savings Plans
Describe prepaid tuition plans?
Allows contributors (usually parents) to prepay future tuition at today’s rate or purchase tuition credits to pay future tuition cost for a particular school
What are some of the risk associated with prepaid tuition plans? (2)
The beneficiary (child) may chose a school different from the one named in the plan, and he/she may not get accepted into the school named in the plan
How is the investment performance measure for Prepaid Tuition Plan measured vs a College Savings Plan?
Prepaid tuition plan uses inflation-base performance which means it may be more suitable for risk-averse investors where College Saving Plans uses market-base performance which means its more suitable for risk-tolerant investors.
What is the difference in coverage between Prepaid Tuition plans vs College Savings Plans?
Prepaid tuition covers tuition and mandatory fees only whereas College Saving Plans covers that plus books, required supplies and room and board (must be enrolled at least half time for College Saving Plans)
Can 529 Plans be pledge as security for a loan?
No
What is the penalty for a nonqualifed distribution from a Section 529? (2)
The earnings portion will be included in the gross income of the distribute plus an a 10% penalty
What are reasons that penalty from a Section 529 or a CESA distribution would be waived? (3)
1) The distribution was made to the beneficiary on and after their death, or
2) the beneficiary is disabled, or
3) made on the account of a scholarship, allowance, or payment being received by the account holder is to the extent that the amount of the payment or distribution doe snot exceed the amount of the scholarship, allowance, or payment
