Mod 8: Education Planning Flashcards
3 Step Process for Calculating How Much Will Be Needed to Pay for College
1) Find the inflation-adjusted annual college costs. Calculate the FV of annual college costs when payments for school begin
2) Determine the lump sum to cover all college costs. Calculate the PV of an Annuity Due (Calculator must be in BEG mode)
3) Discount the future lump sum amount back to today’s dollars. Calculate the PV of step 2’s PVAD
Education Planning
An index number that colleges use to determine the amount of family-paid annual college costs.
Expected Family Contribution (EFC)
Education Planning
How does the EFC affect education planning?
The EFC is subtracted from the total annual cost of attendance to determine the amount of financial aid that students receive.
Education Planning
What four separate calculations are made to constitute the EFC (Expected Family Contribution)?
1) Parental Income
2) Parental Assets
3) Student Income
4) Student Assets
EFC Equation
EFC = (22%-47% parent income + 5%-5.64% parent assets + 50% student income + 20% student assets)
Education Planning
Notable parental asset exceptions for the EFC calculation
- home equity
- cars used for regular transportation
- cash value of a life insurance policy
- accrued benefit or account balances in any retirement plans
Education Planning
What is the lookback period for parental taxable and nontaxable income for the purposes of EFC?
2 years
Education Planning
Federally Funded Loans for Education
- Stafford Loans
- Parent Loans for Undergraduate Students (PLUS Loans)
- Direct Consolidation Loans
Education Planning
Federal Grants for Education Funding
- Pell Grants
- Federal Supplemental Educational Opportunity Grants (FSEOGs)
- TEACH Grants
Education Planning
Types of Trusts used for education funding
1) A Minor’s Trust [2503(c)]
2) A Current Income Trust [2503(b)]
3) A Crummy Invasion Trust
Education Planning
The 2 major tax credits for higher education costs
- The American Opportunity Tax Credit
- The Lifetime Learning Credit
Education Planning
How does the American Opportunity Tax Credit Work?
- Reduces a family’s tax dollar-for-dollar in an amount equal to 100% for the first $2k of qualified postsecondary expenses and 25% for the next $2,000 of qualified postsecondary expenses
- -Therefore a max credit of $2,500 is allowed
- Only for first 4 years of postsecondary schooling
- There are income phaseout limits
- 40% refundable (with exceptions based on who files)
Education Planning
Lifetime Learning Credit Rules
- Unlike the American Opportunity Tax Credit, it is not limited to any number of years
- The amount of the credit allowed is 20% of the first $10k of qualified tuition expenses paid by the taxpayer for any year in which the American Opportunity Tax Credit is not claimed for the same student.
- Max NONREFUNDABLE credit of $2k/yr/family
- There are income phase out limits
Education Planning
Student Loan Interest Deduction Rules
- Only eligible for loans incurred solely for qualified higher education expenses
- There are income phase out limits
- Max of $2,500/yr above the line deduction
Education Planning
Under what circumstances can a taxpayer claim an American Opportunity Tax Credit or Lifetime Learning Credit for the taxable year and also exclude from gross income amounts distributed from a Section 529 plan or CESA?
If the Section 529 plan or CESA tax-free distributions are not used to pay the same expenses for which either the American Opportunity Tax Credit or Lifetime Learning Credit was claimed.
Who are Pell Grants, FSEOGs, TEACH Grants, PLUS Loans, and Stafford Loans available to?
How do the American Opportunity Tax Credit and the Lifetime Learning Credit differ?
