General Principles Chapter 6 Flashcards
Education Planning
Needs Analysis Steps
- determine cost of college first year (fv)
pv - current cost of 1 yr college
n - how many years until starting college
i/yr - rate that college cost grows at
fv solve - determine 4 year cost of college (lump sum amt future value)
pmt = fv from above
n= 4 (yrs of college)
i/yr = real rate of return (use parents required ror and rate that college cost grows at
pv solve
determine savings amt
- find lump sum needed today (how much to invest today)
fv = pv from previous step
n = years until college
i/yr = after tax return (we already accounted for inflation so just need to know parents ror)
pv solve - find pmt amounts today to save every year (either beginning or end)
fv = pv from step 2
n = years until college
i/yr = after tax return
pmt solve
4 Funding Strategies
UTMA/UGMA
EE Edu Bonds
Coverdell Savings
529 Plans
Grants & Loans - Wealthy
wealthy parents are a plus
parent plus loans
Grants & Loans - PooriSh
70k < income
pell grants
supp education opp grant
subsidized stafford loans
American Opportunity Credit
first 4 years of college only
magi phase outs given on exam
2k + 25% of next 2k expenses (max 2500 credit)
at least a half time student
expenses paid w/ grants or schollys dont count
expenses for room n board dont count
expenses include tuition, fees, course material
cannot combine credit w anything else for the same child
Lifetime Learning Credit
all higher ed - undergrad & grad
2k max
20% of first 10k expenses
claim for unlimited period of time as long as qualifying expenses are incurred
magi phaseouts give on exam
cannot combine credit w anything else for the same child
Coverdell Withdrawal
use before student is 30
magi phaseouts on tax sheet
529 Distribution
no phaseouts
Grad Year Options
fulbright scholarship, stafford loan, 529 dist or coverdell withdrawal
Gifts of Present Interest
UTMA/UGMA, 529, Coverdell
Not a Complete Gift
ee edu bonds if parent owns the bond
529 Plan types
prepaid edu or college savings
Investment Return for 2 Types 529
CS: market based performance
PT: tracks tuition inflation
Risk Tolerance for 2 Types 529
CS: risk tolerant
PT: risk averse
Effect on Fin Aid for 2 Types 529
both: considered parents assets
greatly reduces students eligibility in needs based financial aid
Enrollment for 2 Types 529
CS: open enrollment
PT: limited
Covered Edu for 2 Types 529
CS: undergrad & grad
PT: MAY be undergrad only
Use Restrictions for 2 Types 529
CS: can include room & board
PT: generally limited to tuition and mantatory fees
Coverage by State for 2 Types 529
CS: avail in whatever state
PT: may restrict out of state cost
School Choice for 2 Types 529
CS: does not impact investment
PT: impacts investment return
Refunds for 2 Types 529
CS: return of investment, all earnings subject to 10% penalty
PT: investment + low rate of interest
Gifting
18k without gift tax filing (per estate tax law) per donor
OR
use up to 5 years of exemption at once and do not gift anymore during that period 18k x 5 = 90k
Gifting Through Trust
5 year averaging not available
Rollover Rules
not considered a distribution but only one transfer to a different institution every 12 months
529 Control of Assets
beneficiaries do not gain control over assets
529 Bene Change
in same family in same generation = no taxable gift
generation below = taxable gift
k-12 529 Withdrawals
under TCJA, can withdraw up to 10k from 529, which is new and may eliminate the need for coverdell ESA
Student Loan 529 Withdrawals
may allow to pay for student loans up to $10k lifetime limit
Coverdell ESA Contribution Info
2k per STUDENT not per donors (anyone can contribute)
not deductible
contribute up to tax filing due date
phase out
Coverdell ESA Use Info
may be used for elementary/secondary education\
tuition, fees, tutoring, books, special needs stuff, room and board, uniforms, transfportation, after school programs, computer/equipment needed
Coverdell ESA Age Limit
all funds must be used before student reaches 30, unused contributions remain in the pln
Can you maintain a coverdell esa & 529
YES
UGMA Investments
cash type: ee bonds, stocks , mutual funds, CDs savings accts
(remember: UGMA = ugly = no beautiful real estate)
UTMA Investments
UGMA investment types + real estate and LPs
UGMA Transferred to Child
at age of maturity (depending on state) 18 or 21
(remember: UGMA = ugly = younger kids are ugly)
UTMA Transferred to Child
up to age 25
UGMA/UTMA Gift Tax
gift of present interest 18k exclusion
UGMA/UTMA Taxation
subject to kiddie tax
UGMA/UTMA Fin Aid
assets count as owned by child
Purpose of Kiddie Tax
discourage shifting income to kids (who are in a lower bracket) as a tax avoidance technique
When does kiddie tax apply for kids with unearned income
when kids unearned income (i.e. interest income) is greater than $2600 w/ one living parent
Kiddie Tax Calculation
if it applies:
1. 1300 standard deduction - i.e. no tax applied to first 1300 of income
2. next 1300 taxed at childs rate 10% ($130)
3. anything over 2600 taxed at parents rates
if child has earned income: step one deduction is earned income + 450
UGMA/UTMA Transfers
some states allow transfers from ugma/utma to 529s
CHILD STAYS OWNER
BENE CANNOT BE CHANGED
EE Bonds Features
purchased in parents names
redeemed in year that parent pays higher edu expenses
NO ROOM AND BOARD
interest is fully exempt from fed taxes
Coordinate Tax Credits w/ Coverdell
cannot claim tax credit on the same dollars, can claim one of them if thre are sufficient expenses to cover both
Coordinate Tax Credits with 529
claim credit for expenses in addition to wha distribution from 529 was for
Student Loan Interest Deductions
above the line eduction for interest on qualified education loans
max 2500
phaseouts on exam
Pell Grants
7k max
undergrad only
formula: cost of attendance - expected fam contribution
efc 6600
Subsidized Stafford Loans
for students who show financial need after efc & pell grant
Supplemental Edu Opp Grants
for pell grant recipients and up to 4k a year
Public Service Loan Forgiveness
government and nonprofit employees forgiven after 120 payments , or 10 years as a firefighter, teacher, military, govt nursing
Total and Permanent Disability Discharge
if you cannot work due to total and permanent disability, balance may be canceled
Teacher Loan Forgiveness Program
5k-17.5 in loans forgiven (drect subsidized and unsubsidized, not plus) - elementary/secondary or low income agencies
Income-Driven Repayment Plans
based on income
