Jul 05

As my regular readers will recall, I often pass Walden Pond, as I live a few towns away, and while writing at Walden Pond, Thoreau wrote, “Our life is frittered away by detail. Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand; instead of a million count half a dozen, and keep your accounts on your thumb-nail.” Partially with this in mind, I like when a bit of proposed tax code aims to provide some level of simplification to our utterly incomprehensible too-long code.

The particular proposal I am looking at today offers to simplify the tax benefits for higher education. as the Ways and Means report states:

  • Under current law, there are 15 different tax benefits relating to education that often overlap with one an other.
  • The current-law education tax benefits are so complicated that they are ineffective because many taxpayers cannot determine the tax benefits for which they are eligible.
  • The IRS publication on tax benefits for education is almost 90 pages long.
  • Streamlining education tax benefits would enable taxpayers to understand better the tax benefits for which they qualify.
  • The provisions would help to simplify considerably the tax benefits relating to education.

The above puts in perspective just how difficult it is for the average parent to navigate their choices amongst the different benefits. The new proposal appears simple, a 100 percent tax credit for the first $2,000 of certain higher education expenses and a 25 percent tax credit for the next $2,000 of such expenses. So far, so good. A total $2500 gift from Uncle Sam to pay for your child’s college tab. Not so fast, a phase out for MAGI between $86,000 and $126,000 for joint filers and $43,000 and $63,000 for other filers. This is a tough one for me. For a Joint filer, that next $20K of income will kill $2K worth of the tax credit. In effect, a 10% extra phantom tax for the AGI between $86K and $106K for that couple. Many people with college age children are not far from retirement, and on my advice, they might be navigating to avoid the phantom tax that will hit retired couples on their social security income. The effect of this phaseout is that a couple will see a phantom 25% rate for income that should otherwise be taxed at 15%, the 15% bracket I suggest that pre-retirees “top off” by converting some money to their Roth IRA. I suppose that any credit such as this one should have a cap, an income level above which one doesn’t qualify. The real question is whether a joint AGI of $86K is the right level for the phaseout. My own opinion is no, I think $125K or higher is more appropriate. What do you think?

It doesn’t end there. The government gives and the government take away. This provision includes the repeal for the exclusion from United States savings bonds used to pay higher education tuition and fees. In other words, you followed the rules, you patriotically bought US savings bonds with the promise that the growth would not be taxed if these were used to fund higher education. Ouch. The estimate is that this will save $100M over 10 years, so only $10M per year or so. But save in this case means that people will be taxed when they weren’t expecting to pay tax on this money.

Other take-aways include the repeal of any student loan interest deduction, the repeal of deductions for qualified tuition, and the end of the Coverdell Education Savings Account (The account formerly known as the education IRA.)

That’s about it. It seems that simplification comes at a price, and anyone who thinks they understand today’s tax code enough to benefit from it had better keep up on changes that our congress may vote on. To miss these changes can be quite costly.

written by Joe \\ tags:

May 29

Following pi day (3/14) and “May the fourth be with you” day (5/4), we’ve now arrived at 5/29, and it’s time to ask – Do you know what a 529 savings account is? Do you care?

In the US, we have the opportunity to save money in a College Savings account, otherwise known as a 529 account. Funds go in after tax, much like a Roth IRA or Roth 401(k), grow tax deferred, and if used for higher education, can be withdrawn tax free. Sounds simple, but as they say, the devil is in the details.

First, let’s be clear, the 529, just like our retirement accounts, is a designation, a box to hold an investment. A 529 is not an investment, but a type of account. The rules on what can be put into it offer a limited selection from any provider. You can’t buy individual stocks, but most providers have an S&P fund as one of their choices. If you choose this fund, keep in mind what your child’s timing is and be sure you plan wisely. Look at our last 15 years of volatility and ask yourself if school were to start the year after a crash, will your account’s value survive or will it be decimated?

Money deposited to the 529 account is treated as a gift to your child, grandchild, or whoever is the beneficiary of the account you are funding. This means that you can gift $14,000 to the account each year with no paperwork. Your partner or significant other can also gift $14,000. A special rule permits a 5 year gifting, i.e. you may gift $70,000 in one year, with no further gifts for the next 4. A great way to jump start the account. A Form 709 must be filled out to declare this gift, but it’s a formality, no tax is due.

At the other end, the account can only be used for higher education expenses. If your child gets a scholarship, there’s likely to be far more money than you’ll need, but that’s really a good thing, right? You then have two choices, you can withdraw the extra money, paying taxes and penalty on the gains, or change the beneficiary to one of the IRS-approved relatives.

One last thought – even though the deposits are not Federally tax deductible, some states do permit a deduction of some part of the deposit. Check out the rules for your state, and Happy 529 Day, all!

(Anyone else note the irony that 401 day is April Fool’s day?)

written by Joe \\ tags: ,

May 14

This article was written by Gary Dek, a finance blogger who writes about making money, investing, budgeting, career and education planning, credit and debt, and real estate at Gajizmo.com. Gary previously worked for an internet company on their M&A team, as well as investment banking and private equity firms in California. He graduated USC with a degree in financial analysis, valuation and entrepreneurship.

The competition for college scholarships and grants is fierce and even students with excellent grades are no longer guaranteed to receive academic and need-based financial assistance for college. Student loans have never been easier to obtain, but they can mean starting out in adult life with crippling debt. Careful planning by parents can help students get their degree without financing all or even most of their tuition and other costs.

The cost of college tuition is rising at nearly twice the national rate of inflation. The average education costs at private colleges last year was $38,589, while resident students attending state colleges paid about $17,000 per year. Out of state students attending state institutions paid about $29,657 per year for tuition, and these figures do not include living expenses like dormitory fees or food. Books and supplies for college classes add a significant amount to tuition and other costs.

If you are looking for unique ways to fund your child’s college education, you should try making money from home or growing your side-business. The benefit of running your own business while sending your child to college is that you can decide how much of a salary to pay yourself each year, which can increase the amount of financial aid you receive. Since your income is treated differently than your assets (the value of your business, so be conservative with your estimate), a lower income with higher unrealized asset gains can make college more affordable for your family. Otherwise, if owning a business is not an option, stick to these traditional ways of saving and investing money for college.

529 Custodial Accounts

A 529 account is owned by the parent with the child as beneficiary. The money in these accounts can only be used for educational expenses so it is important to start the account with a target figure in mind. Withdrawing funds for non-educational expenses costs a stiff 10% penalty, but the beneficiary on the account can be changed to another child or relative if there is extra money in the account, or if the child opts not to attend college. Additionally, investment gains in the account are tax-free, allowing your money to grow uninterrupted by capital gains or income taxes.

Since there is a penalty for withdrawal of funds for non-educational purposes, it is best not to over-invest in a 529 account, but other investments can be used to complement this savings plan and ensure there is enough money to cover a child’s educational expenses.

Life Insurance

There are several types of life insurance policies that accrue cash value over the years. An endowment policy, purchased in infancy will usually mature in 20 years and pay out a cash payment stated in the policy. Whole life insurance offers the option of taking out interest free loans of up to 90% of the cash value, with no repayment schedule, while keeping the policy in force. These policies also allow young people to have the lowest life insurance premiums for life since whole life is a permanent type of coverage. No income tax is due on loans taken on permanent policies.

People with a slightly higher tolerance for risk may choose a universal life insurance policy. While whole life insurance is invested conservatively and offers a guaranteed rate of interest, similar to other short term investment options, universal life policies utilize riskier investments like stocks and bonds and may yield a higher rate of return over time. Life policies can be set up so beneficiaries receive the face value of the policy minus loans if you should die or the face value plus any remaining equity.

The premiums on permanent policies are considerably higher than those of term life policies so it is best to use these policies as an alternative investment vehicle. Instead of buying all your life insurance in a permanent policy, supplement permanent coverage with cheaper term protection.

Fixed Annuities

A fixed annuity can be a way to save for college tuition if you will be at least 59½ years old while your child is attending college, since penalties for early withdrawal no longer apply. Otherwise, fixed annuities are retirement accounts that have high penalties for early withdrawal. While they are not the best and most recommended way to save for your children’s college, they do have tax advantages over other types of retirement savings. The money invested in fixed annuities and any returns earned on these funds cannot be considered as assets by lenders offering government approved student loans. This means you can keep your retirement funds while qualifying for federal financial aid, including grants and very cheap or subsidized loans.

Nevertheless, sending your child to college should not jeopardize your retirement so it is best to use this type of investment as a retirement account rather than saving for college, unless the two coincide. After all, when you pass 59 ½ and are not within the surrender period of 5 to 7 years after issuance, the annuity begins to pay out an income stream. With that income stream, you are free to do as you please.

Roth IRAs and 401(k)s

Roth accounts differ from traditional retirement savings plans because contributions to Roth accounts are not tax deductible. Income tax is paid on the money before it is put into savings. While the contributions are not tax deductible, you can withdraw contributions, for any reason, without paying a penalty since the money has already been taxed. There is a 10% early withdrawal penalty on investment returns, but this does not apply if the money is withdrawn for qualified educational purposes, including tuition payments. If the returns on your contributions are equal to or greater than the total contributions to your account, you may have to pay a penalty if you withdraw the earnings that exceed the amount of your contribution. Beyond that, Roth IRAs and retirement accounts can be a legitimate source of money for education costs.

Treasury Bonds

Treasury Bonds can be an excellent savings vehicle for those who are financially conservative. At one time, it was commonplace for grandparents and relatives to give U.S. Savings Bonds as gifts to newborn infants so they would begin their adult lives with a nest egg. Unless you need supplies for your new baby, suggest the gift of a Treasury Bond to those who ask what you need. They are available in denominations that cost less than a new stroller or crib and they take years to mature. When your child is ready for college, the treasury bonds given as baby gifts can help pay a significant portion of your child’s schooling expenses.

Final Word

The average income of a person with a college degree is more than a million dollars higher over a lifetime than the income of a person with a high school diploma. Higher education is necessary for the financial success of your child when he or she reaches adulthood and pursues a career. The average cost of a four year college degree is expected to rise to over $100,000 by the year 2016. The best way to ensure the success of your child is to begin a savings plan at their birth. Professional financial advisors can help parents find and execute the best ways to save and invest for the future of their children.

Check out www.Gajizmo.com to find more of Gary’s writing.

written by Joe \\ tags: ,

Aug 13

A guest post from Patricia Shuler –

Take a bite out of your student debt load with these simple tips

Your college years are a tight squeeze, financially—your expenses have never been higher, and your earning power isn’t much more than it was when you were flipping burgers in high school. For most students, that means debt, and lots of it. These money management tips can save you thousands of dollars over the course of your university experience—dollars you won’t be paying interest on when you’re 35. I’ll only mention money-saving moves that will save you over $1,000. There are other ways to cut costs, but these are the big ones.

1. Submit a FAFSA
This is a huge one; a Federal Application for Student Aid (FAFSA) provides access to Pell Grants and subsidized student loans that can make college affordable for almost anyone. If your parents aren’t paying for your college tuition, make sure to mark that on your FAFSA, and you will almost certainly qualify for a grant (unless for some reason you’re already earning middle-class wages after school).
If you’re working a low-paying, part-time job, you can generally qualify for $5,500 a year in Pell Grants, along with $10,000 in yearly subsidized, low-interest student loans—loans that don’t even start accruing interest until you graduate. Over the course of a four-year degree, that adds up to $22,000 in no-strings grant money, along with $40,000 in subsidized loans if you need them.

2. Pick a starter school
If you plan on attending an expensive school, there’s very little reason to complete your general education requirements there. Instead, pick a smaller, two-year school that will provide an “Associate of General Studies” or similar degree for a fraction of the cost, and then transfer to your dream school. Four-year universities generally waive the general-education requirements for students transferring with a two-year degree, so take advantage of the savings. Once you’ve brought home that degree from Stanford or Georgetown, no employer is ever going to ask if you were a transfer student.
Depending on how pricey your school of choice is, this option can save you tens of thousands of dollars over two years, and if your high school grades were less than stellar, it gives you an opportunity to boost your GPA and qualify for better financial aid.

3. Don’t pay full tuition for your internships
In order to work without pay legally, you have to be enrolled at school so the company you intern for can justify the internship as “training”. But the good news is, most companies don’t care what school you’re enrolled at during the internship, and most community colleges will let you enroll in a dirt-cheap summer “class” to cover your internship period, so you don’t have to pay summer tuition at your prestigious, expensive university. Even more so than finding a starter school, this tip is almost always a good idea.

4. Ditch textbooks, buy a tablet
The average student spends $1,200 on textbooks every year—many of which are unhelpful, and almost none of which will be resold at a fair price. Meanwhile, e-book versions of textbooks are routinely priced at one-half to one-third the cost of hard-copy editions, especially if you go with “rental” versions whose rights expire. Over the course of four years, buying e-book editions at half price will save the average student $2,400. Tablets won’t replace laptops, at least not for a couple years, but the extra money you’ll put down for a tablet will be made up in textbook savings within the first year.

Patricia Shuler is a BBGeeks.com staff writer from Oakland, California. She’s an admitted tech-junkie who’s quick to share her honest opinion on all things consumer electronic—including up-to-date news, user reviews, and “no holds barred” opinions on a variety of social media, tech, computer, and mobile accessories topics.

written by Joe \\ tags:

Feb 11

Unemployment for those 16-24 is still running 16%. This includes new college graduates. While the graduates rate is certainly lower than this average, the number of jobs available is not keeping up with demand, yet the cost of college hasn’t fallen, and these graduates are saddled with debt.


written by Joe \\ tags: ,