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Archive for the ‘Ask the Adviser’ Category

Recently, a blog visitor was searching on the term “EE Savings Bonds,” “Tax Free” and “parochial school.”

Evidently, this visitor has a child in a private elementary or secondary school.  With good planning and generous help from family and friends, he has a number of EE series savings bonds in the child’s name.

Given the tax breaks available for certain higher-education expenses and the increasing costs of private elementary and high schools, it’s a very valid question.

The answer:  No.

Unfortunately, there is no tax advantage for cashing in EE Savings Bonds to pay for private or parochial school tuition and expenses.

The Internal Revenue Code does provide a tax-free incentive to cash in Savings Bonds for qualified higher education expenses subject to certain adjusted gross income limits.  These qualified education expenses are broadly defined and include tuition, fees and certain equipment incurred in pursuing a post-secondary school degree or vocational program. Theses expenses must be incurred at an eligible institution of higher learning which includes virtually all accredited public and private colleges and vocational programs in the US as well as certain participating programs overseas.

Education Savings Bond Programs are described in IRS Publication 970 and can generally be found on page 60 and also on Form 8815 “Exclusion of Interest From Series EE and I US Savings Bonds Issued After 1989.”

The better bet for this parent will be to hold onto the Savings Bonds until after the child is enrolled in college.  Because of certain financial aid requirements it may actually be best not to sell them during the student’s high school senior year because of the base year calculation of the Expected Family Contribution.

For more specific help in developing a tax and financial aid plan, consider my exclusive College Planning Services.

Call the College Planning Helpline at 978-388-0020.

Exclusive College Planning Service Helps Parents with Costs

Need Help Financing College? Don't Just Get a Loan. Get a Plan

 

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If you have two years before your student enters college …

 Test Prep

Every tenth of a point added to a student’s GPA may save thousands of dollars in loans that won’t have to be paid back later because colleges will give preferential aid to good students.  So now’s the time to consider test prep courses for the SAT.

 

Business Interest

Financial aid is based on the parents’ tax return from the base year (the year before the student enters college).

So any strategies (including tax strategies) that can lower the reported family income may help improve odds for financial aid. If you have any interest in running a business on the side or working as an independent contractor (i.e. real estate agent or MLM distributor, for example), now  would be the time to start.  That’s because most businesses will show losses during the first couple (or more) years which can help lower the Adjusted Gross Income and improve odds for financial aid.

 

Real Estate Strategies

Use home equity if you have any.  The possible “triple play advantage” for this option is clear:  1.) in most cases there is a tax deduction for the interest, 2.) you temporarily reduce the equity in your property and lower your asset value which lowers your potential family contribution and 3.) as a secured loan, the interest rate is low compared to other options.

Another late-stage planning technique is to use the proceeds to buy an immediate annuity.  This can shelter the capital and the payout can be used toward the mortgage payment. For details on this strategy, call for a College Cash Flow Planner Model.

 

FOR MORE PERSONAL TIPS, CALL STEVE @ 978-388-0020 or 617-398-7494

Exclusive College Planning Service Helps Parents with Costs

Need Help Financing College? Don't Just Get a Loan. Get a Plan

 

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Social Security benefits can be complex to calculate and understand for almost anyone who doesn’t work at Social Security or do this every day.

And the bottom line impact can be huge in terms of cash flow and potential tax liability.

Special Rule for 1st Year Retirees

You may be interested in knowing that there is a special rule for the first year you retire.

Sometimes people who retire during a year already have earned more than the yearly earnings limit. That is why there is a special rule that applies to earnings for one year, usually the first year of retirement. Under this rule, you can get a full Social Security check for any whole month you are retired, regardless of your yearly earnings.

So for the months that you did not work or earn less than the maximum, you will receive your full benefit but not have the SSI benefit reduced.  If you are retired and under Full Retirement Age, you are considered “retired” if your earnings are under $1,180 for that month and are not for all intents and purposes performing work as “self-employed”.

And the earnings test is limited to earned income above $14,160 in a year.  This number does not include dividends, interest, capital gains or IRA distributions.  Only if your earned income is above the limit will there be a reduction of benefits ($1 less in benefits for every $2 earned above).

In the year that you reach your Full Retirement Age (FRA) which is also known as Normal Retirement Age (NRA), the calculation is a little different.  Benefits are reduced $1 for every $3 earned above a different limit. If you were born between in 1945 or 1946, your FRA is 66 and that limit is $37,680.

Taxing Social Security Benefits

Now taxation of benefits is a different issue. During the last tax season, I had a few individuals who came in and didn’t realize that their benefits needed to be reported on their taxes.  They were more than shocked when they found out that their benefits were taxable and the refund that they thought they were getting was never going to happen.

Everything is added in including municipal bond income (which is otherwise and usually non-taxable).  Then up to 85% of SSI benefits may be taxed at your current rate if it is above certain exemption limits.  These start around $25,000 for a single taxpayer and around $32,000 for joint filers.

If you are married filing separately, you will likely be subject to taxes on the benefits without the help of an exemption.

To avoid a surprise when you file your taxes, you may want to get help in calculating your potential tax liability.  And if necessary file a Form W-4V to have a portion of your benefits withheld to defray your tax liability.

For more specific help with financial planning issues related to this or other issues or help in preparing your taxes, please call or email me and we can arrange to help.

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For most families, paying for college for their kids rivals buying a home as the largest investment that they will ever make.

College is viewed – and rightfully so – as a key to a better future.  Even as the cost of college continues to escalate at a pace almost double the inflation rate (nearly 5% per year compared to the historic average of nearly 3% for CPI), there is still a high and growing demand for higher education services.  The proportion of high school graduates who enroll in a degree program within one year of graduating from high school has grown from 49% in 1976 to 66% in 2006-07 according to the College Boards “Trends in College Pricing 2008” report.

Going to College:  Still Worth It

Generally, it is still worth the investment.  According to the US Census Bureau, those with a college degree on average will earn a median income of nearly twice that of someone with a high school degree. And other research indicates that those with a college degree historically have lower and shorter periods of unemployment.  (This may not seem like it as we go through the ongoing impact of the Great Recession but there is data supporting this).

Colleges know this and as a result price their “product” according to this demand for more educational services. One result is that without consumer pressure the colleges are pricing their “product” at whatever the market will bear.  And that price tag continues to go up. At last count, a four-year degree at a public university was around $16,000 per year for all tuition and fees. For private schools this number falls into the $34,000+ per year category.

To pay for this some parents will do almost anything and make almost any sacrifice sometimes to the detriment of their own financial health. So how do we balance the long-term investment in our children with the long-term investment in our own retirement?

Do you want to pay less for your student’s college education? Do you want to find a better way to balance paying for college without sacrificing your retirement nest egg? Be an informed consumer. Wrong, outdated or misguided information about paying for college or qualifying for financial aid just compound the problem for many families.

Too often families are under the mistaken belief that there is nothing that they can do but suck it up and write the check.  Or there is the dream of the big money athletic scholarship.  Or they mistakenly think that there is no financial aid.

All of these beliefs are dangerous to your family’s financial health. The key is having the right information and help to navigate through the minefield that is college funding and financial aid.

Myths about Financial Aid

1. Not Enough Financial Aid is Available.

During the 2009-2010 academic year, students received about $168 billion in financial aid.  This included the entire spectrum of aid such as grants, scholarships, Work Study, low-interest and government-subsidized loans. The largest proportion of this aid is in the form of loans.  Despite the budget woes in Washington, there is still money available for college through these programs.

2. Only students with good grades get financial aid.

Not true.  Colleges are seeking diversity among their classes.  Admissions officers are looking to have students from every socio-economic demographic represented.  And every student has some special skill to add to the mix. The key here is to match up the right student with the right school.  Is it better to be a big fish in a little pond or a small fish in a big pond?  Someone who is a “B” student but with a particular aptitude in a subject might have better odds of getting into a smaller school and be offered aid than the valedictorian competing with every other valedictorian applying to Harvard.

3. You have to be a minority to get financial aid.

Again, this is false.  Financial aid comes in many forms.  Loans are awarded based on the Expected Family Contribution (EFC) which is influenced by family size, parental income, and number of kids attending college at the same time. Loans are need-based and are color-blind.

4. I won’t need government help.  I’ll get scholarship money.

While you may have a talented student who excels in a particular sport, extracurricular activity or is gifted academically, hope is not a plan.  Consider the fact that National Merit Scholarships are very prestigious but can be  double-edged sword.  A student may receive the scholarship but receive no other aid from the school leaving the parent or student to foot the entire remaining bill.

Remember that College Planning is NOT just saving FOR college. It is not just saving in a 529 Plan.  College Planning is tailored to an individual family’s needs and is focused on SAVING ON the cost of college by using all the strategy tools in the financial aid tool box:  savings, investments, taxes and EFC reporting.

5. I make too much money to qualify for any aid or be able to do anything to lower the cost.

False.  This is the biggest myth of all and the most dangerous.  While a family with significant income may not be eligible for needs-based aid, there are dozens of strategies available that may lower the cost of college.  And even with a short amount of time until school, there are ways to lower the Expected Family Contribution (EFC) before filing a financial aid form.

  • Knowing how and where to hold your assets may help you qualify for more aid.  Hint:  Retirement accounts are a great way to kill two birds with one stone.
  • Checking your ego at the door when completing the FAFSA can help qualify you for more aid.  Be careful how you report the value of home or business equity or your stock portfolio.  Most people overestimate because they don’t know this one tip.

6. I have a child entering college next year and it’s too late to do anything.

Absolute nonsense.  I can literally rattle off at least 12 cost-saving tips including transfer credits, AP testing and proper use of home equity.  There are another dozen ways to lower your EFC and 10 different ways to save in the most tax-efficient way.

For one early retiree I showed him one strategy that netted him more than $9,000 in free, no-strings aid from Babson College for his college freshman son.  For another, I showed him tax strategies that will save him the cost of one year of tuition at Colby College for his soon-to-be freshman.

BOTTOM LINE: The Less You Know, the More You Pay.  The More You Think You Know, the More You Pay. The More You Know, the Less You Really Pay.

Pay Less for College with a Personal College Plan

Saving ON College Starts Here

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Tax Tips for Handling Real Estate in Divorce

Case Study:  First-Time Buyer Credit & Divorce

In 2008, Chris and Jenny purchased a home that qualified for the $7,500 first-time homebuyer credit.

They were married at the time of purchase and applied for the credit on a joint return.

In 2009, they divorced and Jenny received the house. Chris gave up ownership in 2009 and filed Form 5405 stating that he transferred the house to Jenny incident to the divorce [Form 5405, Line 13(e)].

In 2010, Jenny sold the house at a gain of $9,300.

Who repays the credit and how much?

Since Jenny received the home in the divorce, she has to repay the credit. In this example she must repay the entire $7,500 because her gain from the sale was $9,300.

The $9,300 gain was calculated by reducing the basis of the home by the $7,500 credit. If the gain had been less than the $7,500 her repayment would be limited to the amount of the gain.

If she sold it for a loss then none of the credit would have to be repaid.

According to the instructions to Form 5405, Line 13(e), the spouse who owns the residence after the divorce is responsible for the repayment, if any, of the entire first-time homebuyer credit.

Jenny will file the Form 5405 in 2010 and fill out Parts III and IV to repay the credit.

ViewPoint Newsletter for June

TAX HELPLINE:  978-388-0020 or 978-416-4107

Call the Tax and Financial Planning Helpline

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Below is a post from the Boston Tax Institute (May 31, 2011) from Kurt Czarnowski, formerly with the SSA as Regional Communications Director in New England.  Kurt presented to the Merrimack Valley Estate Planners Council, one of my groups a while ago and always had a knack for making the complex and dry information from Social Security enlightening and fun.

Unfortunately, many people do not completely understand how work and earnings impact a person’s ability to collect Social Security retirement benefits. As a result, they may be losing out on monthly payments which are rightfully theirs.

The good news is that the Senior Citizens’ Freedom To Work Act of 2000 eliminated the Social Security annual earnings limitation beginning with the month a person reaches Full Retirement Age (FRA). (From 2000 through 2002, FRA was age 65. However, in 2003, it began increasing, so that FRA is now age 66 for people born between 1943 and 1954.)

This means that if you are at Full Retirement Age or older, and you work, you can receive a full monthly Social Security benefit, no matter how much you earn. In addition, any earnings you may have had prior to the month you reach your FRA do not impact your ability to collect benefits from FRA going forward.

But, if you are under FRA, there is still a limit on how much you can earn and still receive full Social Security benefits. In 2011, the annual limit is $14,160, and if you are younger than full retirement age during all of 2011, you lose $1 in benefits for each $2 you earn above that amount.

If you retire in mid-year, you already may have earned more than the yearly earnings limit, but that doesn’t mean you can’t collect benefits for the remainder of the year. There is a special rule that applies to earnings for one year, usually in the first year of retirement. In 2011, this rule lets you collect a full Social security check for any month your earnings are $1,180 or less, regardless of the yearly earnings total.

It is important to note that if some of your retirement benefits are withheld because of your earnings, these payments are not completely lost. Starting at your full retirement age, your benefit amount will be recalculated, and it will be increased to take into account those months in which payments were withheld.

Retiring? Consider your options and the role of Social Security

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One thing that I will add here is that I have seen first hand the problems that can occur when folks do not understand the rules.

As a registered tax preparer with XtraRefunds, I have had several folks come in to have us prepare their taxes.  They invariably have had false information about Social Security benefits.

I had one case where an individual came to me as a new client.  During the initial intake he failed to answer certain questions. Although he was over age 65, he was still working a full-time job and running a small business on the side.  Only after we had completed the return, did he happen to mention that he was receiving Social Security benefits but he had no paperwork (1099-R or annual benefits statement for instance).

When we finally got the paperwork from SSA and inputted the amounts, his tax status changed considerably from a refund to a liability. This was because a portion of his benefits were taxed.  Not everyone realizes that up to 85% of Social Security benefits can be taxed when you have a gross income above certain levels.

This example stresses the need for having a trusted adviser to work with before you make major money moves instead of relying solely on what friends and relatives might say.

Need help?  Consider a 30-minute free call at 978-388-0020.

Free Phone Consulation on Retirement Issues with a Certified Financial Planner Professional

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For college-bound students, funding retirement has to be the farthest thing from their minds. Yet, with a little planning, parents may be able to kill two birds with one stone. Unfortunately, most parents of college-bound kids tend to overlook some obvious ways to lower the cost of college but wisely using the tax code and some retirement planning techniques can help.

It may be a low-priority item, but this strategy can help parents when it comes to planning how to pay for college. How?  By lowering the Expected Family Contribution (or EFC) of the family and sheltering assets in a retirement account, there is the potential for qualifying for more needs-based financial aid.

Roth IRA

Consider using a Roth IRA for any earnings that a student has from part-time work.  For students over 16 they can put away up to $5,000 each year (or up to their total earnings, whichever is less) from all those part-time or summer jobs. Students already in college can also use this same strategy.

A Roth IRA allows any wage earner regardless of age to put money away now and then later withdraw money without paying taxes on the earnings. When you contribute to a Roth IRA, there is no tax deduction as there is with a traditional Individual Retirement Account (IRA) but there are other advantages.

If a student earns money and the parents leave it commingled in one of their accounts, the balance will potentially be assessed at the student’s higher rate as an asset available for paying for school.  Parents may want to maintain control over funds and have the earnings put into an account in their name but this will show up as a parental asset subject to assessment by the financial aid formulas used by colleges.

On the other hand, funds in a Roth IRA are not counted and will not affect financial aid calculations.

Follow the Road Map

The key to this strategy is following the rules of the road. Any funds placed in the account as a contribution may be withdrawn at any time free of taxes or penalties.

For earnings that may accrue on the account balance, these may be subject to income taxes or penalties but there are exceptions.

Converted Assets

For amounts that were converted from another IRA and recharacterized as a Roth, there are special rules.  For amounts that meet the five-year holding test (from the date the account was first opened) then no income taxes or early withdrawal penalties apply. If a withdrawal is made within five years, then a 10% early withdrawal penalty applies unless it is for a special purpose.  One of the eight special purposes is withdrawals used for higher education expenses.

Withdrawals of Earnings

While income taxes will apply, no 10% early withdrawal penalties apply when the proceeds are used for one of eight special purposes including higher education expenses.

Distribution Rules

For distributions from a Roth IRA you need to note that Roth contributions are always considered to be the first amounts withdrawn.  These are not taxable.  Then any amounts that were converted from other IRAs are considered to be withdrawn second and subject to the time line noted above.  Finally, earnings on the account are considered to be withdrawn last.

Ideal for the Self-Employed Parent

Consider employing your kid in your business and paying them instead of just giving them an allowance.  I write about this on a previous blog found here. This way you can lower the taxable profit from your business which may help you qualify for more financial aid.  And by diverting the wages earned into a Roth IRA as a contribution, your child will not have this asset exposed for the financial aid calculations.

Use It Now or Later

This strategy can be used for late-starters, those who haven’t saved enough for upcoming college bills.

But it can also work very well if you start early.  Since there is a five-year rule in place, open a Roth IRA account even while the child is in middle school and working part-time outside the home or in the family business.  Then by the time the child is ready to enter his third or fourth year of college, he may be able to withdraw some of the earnings to pay for costs without paying any penalties.

By using this strategy, parents can help their students learn to save and the funds can be available in a tax-efficient way during college to pay qualified education expenses.  Or they can skip the withdrawals while in college and use them later for graduate school or to help pay for their first home purchase.

Advantages of This Strategy:

  • Shelters assets from financial aid calculations
  • May help lower family Expected Family Contribution (EFC)
  • Instills value of saving early for goals
  • May help accumulate capital that can be used later for school with tax efficient withdrawals
  • May help save for future home purchase or better yet … retirement

 

For more tips, check out my free webinar offered monthly. For a current schedule visit the Clear View website.

 

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