Module 7

Question 1

Assume that one year’s college tuition is $10,000 today, education inflation is 6%, and the rate of return is 8%. Further assume that Mary is three years old and will begin a four-year college program at age 18. Calculate the amount required to provide higher education funds for Mary.

Answer 1

Keystrokes—Step 1 (Inflate):
„ END mode
„ 1, DOWNSHIFT, P/YR
„ DOWNSHIFT, C ALL
„ 10,000, +/–, PV
„ 6, I/YR
„ 15, N
„ Solve for FV = 23,965.5819

Keystrokes—Step 2 (Adjust):
„ BEG mode
„ 1, DOWNSHIFT, P/YR
„ DOWNSHIFT, C ALL
„ 23,965.5819 +/–, PMT
„ [1.08 ÷ 1.06 – 1] × 100 = 1.8868, I/YR
„ [OR] 1.06, INPUT, 1.08, DOWNSHIFT, % CHG, I/YR
„ 4, N
„ Solve for PV = 93,232.2076

Keystrokes—Step 3 (Invest):
„ END mode
„ 1, DOWNSHIFT, P/YR
„ DOWNSHIFT, C ALL
„ 93,232.2076, FV
„ 15, N
„ 8, I/YR
„ Solve for PV = –29,390.6801, or $29,390.68

IF SOLVING FOR A LEVEL OR PERIODIC PAYMENT:

Step 3 (level payment) HP10bII/HP10bII+
„ END mode
„ 1, DOWNSHIFT, P/YR
„ DOWNSHIFT, C ALL
„ 93,232.2076, FV
„ 15, N
„ 8, I/YR
„ Solve for PMT = –3,433.6998, or $3,433.70

Keystrokes converting future dollars into today’s dollars are as follows:

„ END mode
„ 1, DOWNSHIFT, P/YR
„ DOWNSHIFT, C ALL
„ 93,232.2076, FV
„ 15, N
„ 6, I/YR
„ Solve for PV = –38,902.5428, or $38,902.54

Next, use the $38,902.54 as the FV because inflation and rate of return will be taken into account as payments are increased each year. After solving for PMT, inflate that amount by whatever the inflation rate is in order to calculate the end-of-first-year payment. Each subsequent year, the payment amount will go up by the inflation rate.

Keystrokes—Step 3 (serial payment):

„ END mode
„ 1, DOWNSHIFT, P/YR
„ DOWNSHIFT, C ALL
„ 38,902.5428, FV
„ [1.08 ÷ 1.06 – 1] × 100 = 1.8868, I/YR
„ [OR] 1.06, INPUT, 1.08, DOWNSHIFT, % CHG, I/YR
„ 15, N
„ Solve for PMT = –2,268.0164 × 1.06 = –2,404.0973, or $2,404.10

The $2,268.02 (rounded) PMT amount is adjusted by 6% in order to calculate an end-of-first-year payment of $2,404.10. For the end-of-second-year payment, increase the $2,404.10 by 6% ($2,404.10 × 1.06 = $2,548.35). Each and every year, continue to increase the previous year’s payment amount by the inflation rate. A level payment calculation ($3,433.70 in this example) will start out higher than a serial payment (end-of-first-year payment was $2,404.10 in this case); however, over time, the serial payment will become greater than the level payment.

Question 2

When using the inflation-adjusted rate of return formula, make sure to use the:

Answer 2

education inflation rate as the denominator, not the general inflation rate.

Question 3

If the goal is to use a level or periodic payment to fund the future need (rather than the lump sum identified previously in Step 3), solve for:

Answer 3

PMT instead of PV.

Question 4

Sometimes, clients may not be able to contribute the entire amount needed and would rather have their periodic deposits grow over time. In this case, calculate a:

Answer 4

serial payment (a payment that will increase by the inflation rate each year).

Question 5

Remember, when solving for a level payment, the FV should be an inflation-adjusted amount. However, when solving for a serial payment, you will be:

Answer 5

taking inflation into account when you calculate the PMT and adjusting it each year for inflation. When calculating a serial payment, find the desired amount in today’s dollars and enter it as an FV.

Question 6

Expected Family Contribution (EFC)

Answer 6

An index number that colleges use to determine the amount of family-paid annual college costs. Ultimately, the EFC is subtracted from the total annual cost of attendance to determine the amount of financial aid that students will receive.

Question 7

In determining the EFC for students, four separate calculations are made, the total of which constitutes the EFC. These four calculations are summarized in as follows:

Answer 7

1. Parental income. This includes taxable and nontaxable income from two years prior to the award year (two-year lookback) and is reduced by a specified income protection allowance. The percentage of parent income included in the EFC ranges from 22% to 47% and depends on the parent’s AGI from two years prior, number of dependents enrolled in college, marital status of the parents, and special family circumstances.
2. Parental assets. This includes almost everything owned by the parents with the notable exceptions of home equity, cars used for regular transportation, the cash value of a life insurance policy, and the parents’ accrued benefit or account balances in any retirement plans. Most nonretirement assets (e.g., cash, investments, and savings) are assessed from 5% up to a maximum of 5.64% toward the EFC.
3. Student income. This includes taxable and nontaxable income from the year preceding the award year, reduced by an income protection allowance $7,600 for 2023–2024 and taxes. Student income above the protected amount is included at a rate of 50% in the EFC calculation.
4. Student assets. This includes the value of everything the student owns or that has been saved on his behalf (e.g., a custodial account such as an UTMA or UGMA). Custodial accounts, trusts, and other student-owned assets are assessed at 20% toward the EFC.

Question 8

EFC formula:

Answer 8

([22%–47% parent income + 5%–5.64% parent assets] + [50% student Income + 20% student assets]) = EFC

Question 9

Custodial accounts are considered assets of the:

Answer 9

Child.

Question 10

Parent-owned or dependent child-owned Section 529 plan assets are considered assets of the:

Answer 10

Parent.

Question 11

What assets are included at a rate of 0% for purposes of the EFC calculation when determining financial aid eligibility?

Answer 11

Assets owned by relatives (grandparents, aunts, cousins), on which the student is a beneficiary.

Question 12

Distributions for college from relative-owned accounts reduce future financial aid eligibility by:

Answer 12

50% of the distribution amount (two years following distribution). As a result, proper timing of relative-owned account distributions is of the highest importance to optimize financial aid eligibility. Due to the two-year FAFSA lookback for income and assets for financial aid consideration, relative-owned accounts should be distributed later in college (i.e., junior and senior year). This allows the account to remain outside of the EFC calculation, and the distributions will not impact future eligibility in undergraduate studies.

Question 13

The U.S. Department of Education offers a variety of federal grants to students attending four-year colleges or universities, community colleges, and career schools. Each requires completion of a FAFSA and fulfilling need-based eligibility criteria. The federal grants include the following:

Answer 13

„ Federal Pell Grants
„ Federal Supplemental Educational Opportunity Grants (FSEOG)
„ Teacher Education Assistance for College and Higher Education (TEACH) Grants
„ Iraq and Afghanistan Service Grants

Question 14

To be eligible to receive federal student aid, a student must meet the following requirements:

Answer 14

„ Be a citizen or eligible noncitizen of the United States
„ Have a valid Social Security number
„ Have a high school diploma or a General Education Development (GED) certificate, or have completed homeschooling
„ Be enrolled in an eligible program as a regular student seeking a degree or certificate
„ Maintain satisfactory academic progress
„ Not owe a refund on a federal student grant or be in default on a federal student loan
„ Register (or already be registered) with the Selective Service System (if the student is a male and not currently on active duty in the U.S. Armed Forces)
„ Not have a conviction for the possession or sale of illegal drugs for an offense that occurred while receiving federal student aid (such as grants, work study, or loans)
– Students who have such a conviction must complete the Student Aid Eligibility Worksheet to determine their eligibility for aid.

Question 15

Stafford loans (also known as William D. Ford Direct Stafford loans)

Answer 15

A common type of educational loan. Both direct subsidized and direct unsubsidized loans are offered through the Stafford loan program. Only undergraduates qualify for subsidized Stafford loans. If a student qualifies for a loan based on financial need, the loan generally will be subsidized.

NOTE: Subsidizing a loan means that an entity—usually the government, an employer, or a nonprofit—pays part or all of the loan’s interest, reducing the borrower’s financial burden. This allows the borrower to access funding at a lower effective cost or with more favorable terms than would typically be available.

Any student who is enrolled at least half time is eligible to apply for Stafford loans (part-time students are not eligible). There are limits as to how much may be borrowed each year—the cost of the student’s education less other loans or grants is set as an alternative maximum to specific dollar limits published by the government.

Question 16

Stafford Loan Interest Rates:

• Direct subsidized loans (undergraduates):
• Direct unsubsidized loans (undergraduates):
• Direct unsubsidized loans (graduate or professional students):

Answer 16

• Direct subsidized loans (undergraduates): 5.498%
• Direct unsubsidized loans (undergraduates): 5.498%
• Direct unsubsidized loans (graduate or professional students): 7.048%

Question 17

Parent Loans for Undergraduate Students (PLUS loans)

Answer 17

Parents may borrow funds for their children’s undergraduate studies. The amount that can be borrowed is unlimited, except the total of all aid received cannot be higher than the total cost of schooling.

Question 18

Part-time students are not eligible for:

Answer 18

PLUS funds (but students enrolled in programs that are shorter than an academic year may be eligible for reduced loan amounts).

Question 19

PLUS Loans are / are not need-based?

Answer 19

PLUS loans are NOT need-based.

Question 20

PLUS loan repayment begins within ? days of disbursement, and although repayment may be delayed until the student is out of school, the interest on the loan continues to build during this time.

Answer 20

60 days

Question 21

Direct Consolidation Loans

Answer 21

A type of federal student loan offered by the U.S. Department of Education that allows borrowers to combine multiple federal student loans into a single loan. This consolidation simplifies repayment by reducing the number of loan payments you need to make each month.

Question 22

When does a borrower becomes delinquent on a student loan?

Answer 22

The first day after missing a payment. After the borrower is more than 90 days delinquent on a student loan, the loan servicer may report this delinquency to the major credit bureaus, which, in turn, could negatively affect the borrower’s credit score. A loan that continues to be delinquent for 270 days under the Federal Direct Loan Program or the Federal Family Education Loan Program is considered to be in default.

Question 23

Perkins Loans

Answer 23

Were a type of federal student loan designed for students with exceptional financial need. These loans were part of the Federal Perkins Loan Program, which ended in 2017. Though new Perkins Loans are no longer issued, many borrowers are still repaying them.

Question 24

Pell Grants

Answer 24

A form of federal financial aid provided by the U.S. Department of Education to undergraduate students who demonstrate significant financial need. Unlike loans, Pell Grants do not need to be repaid, making them a highly desirable form of financial assistance.

Question 25

Federal Supplemental Educational Opportunity Grants (FSEOGs)

Answer 25

A form of federal financial aid designed to assist undergraduate students with exceptional financial need. These grants are meant to supplement other financial aid, such as Pell Grants, and do not need to be repaid.

Question 26

How much can a student be awarded with a FSEOG?

Answer 26

Students can receive between $100 and $4,000 per year, depending on:
- Financial need.
- Availability of funds at the school.
- Other financial aid the student receives.

Pell Grant recipients are given highest priority in receiving FSEOGs.

Question 27

Teacher Education Assistance for College and Higher Education (TEACH) Grant Program

Answer 27

Provides grants of up to $4,000 per year to students who agree to serve as a full-time teacher in a high-need field in a public or private elementary or secondary school that serves low-income students.

Question 28

Who is eligible for Pell Grants?

Answer 28

Undergraduate students, part-time students*, half-time students, and full-time students.

*Pell Grants are awarded on a pro rata basis dependent on income and assets.

Question 29

Who is eligible for FSEOGs?

Answer 29

Undergraduate students, part-time students, half-time students, and full-time students.

Question 30

Who is eligible for TEACH Grants?

Answer 30

Undergraduate students, graduate students, half-time students, and full-time students.

Question 31

Who is eligible for PLUS Loans?

Answer 31

Undergraduate students, graduate students, half-time students, and full-time students.

PLUS loans are also available to professional students.

Question 32

Who is eligible for Stafford Loans?

Answer 32

Undergraduate students, graduate students, half-time students, and full-time students.

Question 33

Federal Work-Study

Answer 33

Eligible students are provided employment, which may be on or off campus, to help cover the cost of their education.

Question 34

Hank would like his 10-year-old daughter, Allison, to attend college at Apex State University at age 18 for 4 years. Your financial planning firm has determined that the total amount needed to fund Allison’s college costs is $150,000. Calculate the amount of the monthly deposit into a Section 529 plan with an expected annual rate of return of 6%.

Answer 34

„ END mode
„ 12, DOWNSHIFT, P/YR
„ DOWNSHIFT, C ALL
„ 150,000, FV
„ 6, I/YR
„ 8, DOWNSHIFT, xP/YR (96 should appear on display)
„ Solve for PMT = –1,221.2145, or $1,221.21 per month

Question 35

After meeting with their financial services professional, the Werner family has decided to invest $750 each month into a Section 529 plan for their two-year-old son, Tyler. The Werners expect Tyler to attend State College. The current tuition is $30,000 per year, education inflation is expected to be 6%, and the anticipated rate of return on their investment is 8%. Tyler will attend school beginning at 18 years old for 4 years.

Using these facts, determine whether the current investment plan ($750 monthly deposit), will meet the education savings goal.

Answer 35

Step 1: Determine the future cost of college for the first year.
„ END mode
„ 1, DOWNSHIFT, P/YR
„ DOWNSHIFT, C ALL
„ 30,000, +/–, PV
„ 6, I/YR
„ 16, N
„ Solve for FV = 76,210.5505, or $76,210.55

Step 2: Determine the account balance necessary to fund college education.
„ BEG mode (money is needed at the beginning of college)
„ 76,210.5505, +/–, PMT
„ [(1.08 ÷ 1.06) – 1] × 100 = 1.8868, I/YR
„ 4, N
„ Solve for PV = 296,478.4203, or $296,478.42

Step 3: Calculate future value of current payments.
„ END mode
„ 12, DOWNSHIFT, P/YR
„ 750, +/–, PMT
„ 8, I/YR
„ 16, DOWNSHIFT, xP/YR (192 should appear on display)
„ Solve for FV = 290,406.8620, or $290,406.86

Step 4: Subtract future education need from future value of current payments.
„ $290,406.86 – $296,478.42 = –$6,071.56

They will be short by $6,071.56. As a result, the couple should consider raising the amount of savings to about $766 to break even. Of course, the greater the amount they save, the higher the probability of attaining the goal, especially if the investment does not generate the expected rate of return.

Question 36

Uniform Gift to Minors Act (UGMA)

Answer 36

A U.S. law that allows adults to transfer financial assets to minors without the need for a formal trust. It provides a simple way to manage gifts to children while maintaining legal compliance and ensuring the assets are used for the child’s benefit.

Real estate and other non-financial assets are not permitted under UGMA (but are allowed under the Uniform Transfers to Minors Act [UTMA]).

Question 37

Uniform Transfers to Minors Act (UTMA)

Answer 37

A U.S. law that allows adults to transfer a wide variety of assets to minors without the need for a formal trust. It is an extension of the Uniform Gifts to Minors Act (UGMA) but provides greater flexibility in the types of assets that can be transferred.

Question 38

UGMA and UTMA assets will be included at the child’s rate of ? when calculating the EFC for financial aid.

Answer 38

20%

Question 39

Savings Bond Education Tax Exclusion

Answer 39

A provision in U.S. tax law that allows taxpayers to exclude from federal income tax the interest earned on eligible savings bonds when the proceeds are used to pay for qualified higher education expenses. This exclusion is designed to encourage savings for education.

Eligible Bonds:
Only Series EE bonds issued after 1989 and all Series I bonds qualify.
The bond owner must be at least 24 years old when the bonds are purchased.

Question 40

Series EE Bonds

Answer 40

A type of U.S. government savings bond designed to help individuals save money while earning a fixed rate of interest. Issued by the U.S. Department of the Treasury, Series EE bonds are considered a safe and low-risk investment option, making them attractive for conservative investors seeking a reliable way to grow their savings over time.

Question 41

Coverdell Education Savings Account (CESA)

Answer 41

A tax-advantaged savings account designed to help families save for educational expenses, including K-12 and higher education costs. It allows contributions to grow tax-free, and withdrawals for qualified expenses are also tax-free.

Contribution Limits:
- Maximum contribution: $2,000 per beneficiary per year.
- Contributions are not tax-deductible.
- Contributions must be made by the tax-filing deadline (typically April 15) for the previous year.

Question 42

Key points regarding the CESA include the following:

Answer 42

„ The CESA is established either in a trust or custodial account on behalf of the child.
„ Contributions are limited to $2,000 per year per child, regardless of the number of donors to the account.
„ Contributions are subject to phaseout.
„ All funds within the CESA must be used before the student reaches age 30. Any remaining funds will be disbursed to the CESA beneficiary, and the earnings will be subject to income tax and a 10% penalty. However, in order to prevent this from occurring, the owner of the CESA has the right to change the beneficiary to another family member of the original beneficiary.
„ Only one rollover for a CESA is allowed per individual per year.

Question 43

Section 529 plan, also known as a Qualified Tuition Program (QTP)

Answer 43

A tax-advantaged program that helps families save money for college expenses incurred when pursuing a degree. A QTP offers significant income tax benefits, including the ability to make contributions regardless of the contributor’s AGI, tax-free earnings growth, and tax-free withdrawals to the extent they are used to pay qualified higher education expenses.

Question 44

There are two types of Section 529 (QTP) plans:

Answer 44

1. Prepaid tuition plan
2. College savings plan

Question 45

Prepaid Tuition Plans

Answer 45

Permit contributors (usually parents) to prepay future tuition at today’s tuition rates or purchase tuition credits (units) to apply to future tuition costs. Typically, these plans apply to tuition and mandatory fees only. This type of program also usually requires that the designated beneficiary (usually the contributor’s child) go to any public college or university within the state (or the specific private institution) that established the QTP.

Question 46

College Savings Plans

Answer 46

May be offered only by states, state-sponsored organizations, and eligible educational institutions. The contribution rules are the same as those for prepaid tuition plans. In this type of plan, tuition is not being prepaid, but, rather, a tax-advantaged savings plan is established from which tax-free distributions are made to pay for qualified education expenses.

Question 47

A significant advantage of the college savings plan over the prepaid tuition plan is:

Answer 47

That it does not restrict where the child beneficiary may attend college.

Question 48

UGMA 529 accounts or UTMA 529 accounts

Answer 48

Most states that have previously established a Section 529 QTP plan will permit a contributor to roll over UGMA or UTMA proceeds to the Section 529 plan account on behalf of the child.

Question 49

ABLE Accounts

Answer 49

Provide individuals with disabilities and their families with the ability to fund a tax-preferred savings account to pay for qualified disability-related expenses.

Question 50

Kiddie Tax

Answer 50

A tax rule in the United States that applies to certain types of unearned income (like interest, dividends, and capital gains) earned by children under age 18, as well as full-time students aged 19-23 who do not provide more than half of their own support. The kiddie tax is designed to prevent parents from shifting investments to their children to take advantage of their typically lower tax brackets.

Question 51

A Minor’s Trust

Answer 51

A legal arrangement designed to hold and manage assets on behalf of a minor (someone under the age of majority, typically 18 or 21, depending on state laws). The trust ensures that the minor’s assets are managed responsibly until they are old enough to handle them independently.

If money is put into this kind of trust for a child, the potential taxes may be higher than the child’s or parent’s tax brackets. Additionally, the funds generally must be given to the child when he or she reaches age 21.

Question 52

Current Income Trust

Answer 52

A trust that requires the distribution of all or part of its net income to its beneficiaries. The trust instrument must specify that all income is to be distributed, and that no amounts are to be set aside or used for charitable purposes.

This typically presents problems in avoiding the kiddie tax; however, it has a substantial offsetting advantage to many grantors (the persons putting the money in the trusts). The trust property, or principal, need not be distributed to the child at any specified age. This ensures the segregated funds are used only for the purpose they were intended—that is, the child’s college education.

Question 53

Crummey Trust

Answer 53

A type of irrevocable trust that allows a grantor to make gifts to beneficiaries without incurring gift tax by giving the beneficiaries a temporary right to withdraw the contributed funds, essentially creating a “present interest” in the gift, which qualifies for the annual gift tax exclusion; the term “Crummey” comes from a legal case where the concept was established, allowing individuals to utilize this strategy to transfer wealth while minimizing taxes.

Question 54

An individual may make a contribution to a 529 plan up to the annual exclusion amount of ? without any tax implications to the donor or recipient.

Answer 54

$17,000

In addition, donors are eligible to deposit up to five times the annual exclusion amount through an accelerated, or ratable, contribution. For example, in 2023, a contributor is permitted to make one $85,000 contribution (the gift tax annual exclusion of $17,000 multiplied by five) and treat the contribution as if made ratably over the current year and the next four years (a total of five years).

Question 55

if the 529 contributor splits a gift with a spouse, a one-time contribution (every five years) of ? may be made to any beneficiary, including the account owner, if so desired.

Answer 55

$170,000

($85,000 + $85,000)
($17,000 x 5 = $85,000)

Question 56

A Section 529 plan is considered an estate planning tool because:

Answer 56

Contributions made to the plan are removed from the donor’s taxable estate, meaning the money is not counted as part of their assets when calculating potential estate taxes, while still allowing the donor to retain control over the funds and designate the beneficiary, providing flexibility in distributing wealth to heirs.

However, if the contributor does not outlive the five-year period, the $85,000 contribution exclusion is prorated annually; for example, if the contributor-owner dies after three years, $34,000 (or $17,000 multiplied by two) would be included in her estate.

Question 57

In the event the college funds for Student A are no longer required, can a 529 be retitled for Student B?

Answer 57

529s, if the parents are owners, can be transferred to another beneficiary (e.g., Student A’s sibling or cousin) if permitted by the plan.

Question 58

In the event the college funds for Student A are no longer required, can a Coverdell ESAs (CESAs) be retitled for Student B?

Answer 58

Coverdell ESAs (CESAs) can be transferred to another beneficiary.

Question 59

In the event the college funds for Student A are no longer required, can UGMAs and UTMAs be retitled for Student B?

Answer 59

UGMAs and UTMAs cannot be transferred to another child.

Question 60

In the event the college funds for Student A are no longer required, can Trusts be retitled for Student B?

Answer 60

Trusts can be established individually or with multiple beneficiaries. In both cases, funds need to be allocated to the stated beneficiary. There are pot trusts that pool money for beneficiaries but do not specifically allocate. Treatment of trust funds is commonly spelled out at inception, not designed to switch beneficiaries.

Question 61

If the 529 has accumulated an account balance that is no longer needed, who assumes control of the assets at 18, or age of majority?

Answer 61

Account owner’s assets; the funds are not transferred to the student at age 18.

Question 62

If the Coverdell (CESA) has accumulated an account balance that is no longer needed, who assumes control of the assets at 18, or age of majority?

Answer 62

All funds must be used before child reaches 30.

Question 63

If the UGMA and UTMA has accumulated an account balance that is no longer needed, who assumes control of the assets at 18, or age of majority?

Answer 63

Custodial accounts in the child’s name; when child reaches age of majority (18 or 21 depending on state), they assume ownership of the account and are not required to use the funds for education.

Question 64

If the Trusts 2503(b) has accumulated an account balance that is no longer needed, who assumes control of the assets at 18, or age of majority?

Answer 64

Can hold funds beyond beneficiary’s age of majority; 2503(c)—principal or income required to be distributed by age 21; trust with spendthrift provision—disburses funds for college expenses only and remains in the control of the trustee beyond the age of majority.

Question 65

American Opportunity Tax Credit

Answer 65

A tax credit designed to help offset the costs of higher education for eligible students in their first four years of postsecondary education. It is a part of U.S. tax policy aimed at making college more affordable.

Amount of Credit:
- Up to $2,500 per eligible student annually.
- The credit is calculated as:
100% of the first $2,000 of qualified education expenses, plus
25% of the next $2,000 of qualified expenses.

Refundability:
- The AOTC is partially refundable.
- If the credit reduces your tax liability to zero, up to 40% of the remaining credit (up to $1,000) can be refunded to you.

However, none of the credit is refundable if the taxpayer claiming the credit is a child who (1) is under age 18 (or a student who is at least age 18 and under age 24 and whose earned income does not exceed one-half of her own support), (2) has at least one living parent, and (3) does not file a joint tax return.

Question 66

Lifetime Learning Credit

Answer 66

A tax credit available to students who are enrolled in eligible postsecondary education courses. Unlike the American Opportunity Tax Credit (AOTC), which is available for the first four years of undergraduate education, the LLC can be used for an unlimited number of years, making it available for both undergraduate and graduate courses, and even for courses taken to improve job skills.

Amount of Credit:
The LLC is worth 20% of the first $10,000 of qualified education expenses per tax year, with a maximum credit of $2,000 per tax return (not per student).

Question 67

A taxpayer can claim an American Opportunity Tax Credit or Lifetime Learning Credit for the taxable year and can also exclude from gross income amounts distributed from a Section 529 plan or CESA, but only if the Section 529 plan or CESA tax-free distributions are:

Answer 67

not used to pay the same expenses for which either the American Opportunity Tax Credit or Lifetime Learning Credit was claimed.

Question 68

The American Opportunity Tax Credit and Lifetime Learning Credit may not both be claimed in:

Answer 68

the same year for the same student.

Question 69

Taxpayers may waive the American Opportunity Tax Credit or Lifetime Learning Credit even when:

Answer 69

they qualify for one of the credits.

This may be the case if the tax savings resulting from the credit is less than the savings from the income tax-free treatment of Section 529 plan withdrawals.

Question 70

The student loan interest deduction may be used in combination with:

Answer 70

any of the other educational tax benefits, including the American Opportunity Tax Credit or the Lifetime Learning Credit.

Question 71

Section 162 Employee Benefit

Answer 71

An employer may provide an unlimited amount of educational assistance to an employee so long as this assistance is job related. This is known as a Section 162 employee benefit because it is made as part of an employer’s deductible ordinary and necessary business expenses under IRC Section 162.

Question 72

IRC Section 127

Answer 72

An employer may also provide up to $5,250 of non-job-related educational assistance to an employee during any one year as a tax-free employee benefit under IRC Section 127. This benefit may be granted for either undergraduate or graduate study. However, the benefit is limited to the lesser of the amount of qualifying educational expenses (defined as tuition, fees, books, supplies, or equipment) or $5,250 in any given year.

Question 73

Ervan has been working full-time for a local arborist while taking night classes on a part-time basis in pursuit of his MBA. His employer offers reimbursements for qualified expenses through the educational assistance programs under IRC Section 162 and IRC Section 127. This year, Ervan has incurred the following educational expenses:

„ Enrollment fees: $100
„ Tuition: $4,000
„ Books: $500
„ Computer lab fee: $50
„ School apparel: $150
„ Financial calculator rental fee (calculator must be returned at end of course): $25

Because Ervan’s pursuit of the MBA is unrelated to his horticulture work with the arborist, Section 127 would apply. Based on these expenses, Ervan can receive ? for reimbursement under Section 127.

Answer 73

$4,675

His qualifying expenses equal $4,675 ($100 + $4,000 + $500 + $50 + $25). The financial calculator fee is a qualifying expense because the calculator will be returned at the end of the course.

Question 74

Barry and Virginia have a six-year-old son, Daniel. They have plans for Daniel to attend a four-year private university at age 18. Currently, tuition at the local private university is $15,000 per year and is expected to increase at 7% per year. Assuming Barry and Virginia can earn an annual compound return of 10% and inflation is 4%, how much does the couple need to start saving at the end of each year (starting this year) to be able to pay for Daniel’s college education? (Assume their last payment is made at the beginning of Daniel’s first year in college.)

A. $5,144.86
B. $5,899.93
C. $6,065.35
D. $8,886.18

Answer 74

C. $6,065.35

Explanation: They would need to deposit $6,065.35 per year to meet the education funding goal.

Step 1: Determine the future cost of college for the first year.
„ END mode
„ 15,000, +/–, PV
„ 7, I/YR
„ 12, N
„ Solve for FV = 33,782.8738, or $33,782.87

Step 2: Determine the account balance necessary to fund college education.
„ BEG mode (money is needed at the beginning of college)
„ 33,782.8738, +/–, PMT
„ [(1.10 ÷ 1.07) – 1] × 100 = 2.8037, I/YR
„ 4, N
„ Solve for PV = 129,703.2143 or $129,703.21

Step 3: Determine the required savings payments.
„ END mode
„ 129,703.2143, FV
„ 12 N (payments continue until Daniel reaches 18)
„ 10, I/YR
„ Solve for PMT = –6,065.3523, or $6,065.35

Question 75

Select the parental assets that are excluded from consideration when calculating the Expected Family Contribution (EFC) for federal financial aid.

A. Mutual fund ownership
B. Annual contributions to a retirement plan
C. Rental real estate property
D. The excess of value over the amount owed on a personal residence

Answer 75

D. The excess of value over the amount owed on a personal residence

Explanation: The equity in a personal residence or home is not included in the calculation of the EFC. The accrued benefit or account balance in a retirement plan is an exempt parental asset.

Question 76

To be eligible to receive federal student aid, a student must:

I. be a U.S. citizen.
II. be an eligible noncitizen of the United States. 
III. maintain satisfactory academic progress. 
IV. not be in default on a federal student loan. 

A. II only
B. I and III
C. I, III, and IV
D. I, II, III, and IV

Answer 76

D. I, II, III, and IV

Question 77

Scott and Barbara have come to you for advice on financing their daughter’s fast-approaching college undergraduate education. They have failed to save enough money to finance their daughter’s education but currently have an annual income in excess of $150,000. Unfortunately, they spend as much as they earn. Select a suitable option for the Johnsons if there is a need to obtain education funds.

A. Subsidized Stafford loan
B. Pell Grant
C. Parent Loan for Undergraduate Students
D. Federal Work-Study Program

Answer 77

C. Parent Loan for Undergraduate Students

Explanation: Given the couple’s income level, their only real alternative from the choices offered is a PLUS loan. Subsidized Stafford loans, federal Pell Grants, and the Federal Work-Study Program are need-based.

Question 78

Assume that an adult client is currently in a low marginal income tax bracket and does not anticipate major income increases in the future. He is interested in a low-risk investment purchased in his name that may provide favorable income tax treatment when used for the higher education tuition expenses of his only child. He is also not interested in incurring the expense of establishing a trust when saving for his child’s college education costs. Identify a viable alternative to recommend to the client.

A. An UGMA account
B. A passbook savings account in the child’s name
C. Municipal bonds purchased in the name of the client
D. Series EE savings bond

Answer 78

D. Series EE savings bond

Explanation: Because the client is currently in a low tax bracket and does not anticipate significant income increases in the future, he does not need to worry about the phaseout amounts associated with a qualified savings bond. In addition, to qualify for the tax exclusion on savings bond interest, such a bond has to be purchased in the name of an individual who is at least age 24, unlike the UGMA account, which is the legal property of the child at the time the account is established.

Question 79

Erin’s grandmother recently established a CESA on behalf of Erin, age five, and contributed $2,000 to the account. Now, Erin’s father wants to contribute an additional $2,000 to the account in this same year. Is this permitted?

A. Yes, because both the grandmother and father are family members of Erin.
B. No, only Erin’s father is allowed to establish a CESA.
C. Yes, up to $2,000 per donor can be contributed on Erin’s behalf.
D. No, $2,000 is the maximum contribution per beneficiary in any single year.

Answer 79

D. No, $2,000 is the maximum contribution per beneficiary in any single year.

Explanation: The maximum amount that may be contributed to a Coverdell ESA is $2,000 per beneficiary, regardless of the number of donors or the relation of the donor. The donor does not have to be a family member.

Question 80

Identify a difference between a Section 529 plan and a Coverdell ESA (CESA).

A. The account balance in a Section 529 plan must be distributed to the child upon reaching age 30.
B. The CESA may not be used for higher education expenses.
C. Contributions made to a Section 529 plan are not subject to income limitations.
D. Contributions made to a CESA and not used for qualified education expenses may be reclaimed.

Answer 80

C. Contributions made to a Section 529 plan are not subject to income limitations.

Explanation: Unlike the Coverdell ESA, a Section 529 plan is not subject to phaseout limitations. In addition, contributions made to a Section 529 plan not used for qualified education expenses may typically be reclaimed by the contributor; this is not the case with a Coverdell ESA.

Question 81

George and Betty wish to establish a Section 529 college savings plan for both of their grandchildren. In 2023, what is the maximum amount that they can contribute without making a taxable gift for federal gift tax purposes?

A. $85,000
B. $170,000
C. $320,000
D. $340,000

Answer 81

D. $340,000

Explanation: Because George and Betty have two grandchildren, they may contribute a maximum of $340,000 (or $170,000 for each account in 2023). However, they may make this contribution only once within a five-year period and must file a federal gift tax return reporting these transfers (even though there is no taxable gift).

Question 82

Amanda is a half-time sophomore at ABC University. Tuition payable for 202X was $3,000. Amanda is claimed as a dependent on her parents’ 202X income tax return and her parents have reported a modified AGI of $150,000 for that year. Neither Amanda nor her parents are claiming any other education benefit for 202X. Which of the following statements regarding the possible applicability of the American Opportunity Tax Credit is CORRECT?

A. Amanda’s parents will be able to claim $2,000 of the American Opportunity Tax Credit on their 202X income tax return.
B. Amanda’s parents will be able to claim $2,250 of the American Opportunity Tax Credit on their 202X income tax return.
C. Amanda will be able to claim $3,000 of the American Opportunity Tax Credit on her 202X income tax return.
D. Neither Amanda nor her parents are able to take advantage of the American Opportunity Tax Credit for income tax purposes.

Answer 82

B. Amanda’s parents will be able to claim $2,250 of the American Opportunity Tax Credit on their 202X income tax return.

Explanation: Amanda’s parents will be able to claim $2,250 of the American Opportunity Tax Credit on their 202X income tax return. This amount is determined as follows: (100% × $2,000) + (25% × $1,000). Because Amanda’s parents claim Amanda as a dependent, they are permitted to take the credit. Also, because they are currently below the applicable beginning phaseout, there is no reduction in the amount of credit.

Question 83

According to the Internal Revenue Code, which of the following statements regarding education assistance programs is CORRECT?

I. An employer may provide an unlimited amount of educational assistance to an employee, assuming the education is job related.
II. An employer may provide up to $7,250 of non-job-related educational assistance to an employee during any one year as a tax-free employee benefit.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer 83

A. I only

Explanation: Under IRC Section 127, an employer may only provide up to $5,250 of non-job-related educational assistance to an employee during any one year as a tax-free employee benefit.