Last week, I discussed financing the cost of college education through the Direct Loan program. Another manner of paying for the cost of education is through the usage of Section 529 College Savings Tuition Plans. There is no question that 529 plans, if sufficiently funded, can be used to pay for almost all of the costs associated with education. So, what exactly is a Section 529 College Savings Tuition Plan? The strict answer is it is a tuition savings plan created by Congress in 1996, named after Section 529 of the Internal Revenue Code, which allows a taxpayer to put aside money that can pay for the qualified education expenses of a designated beneficiary. How much money can be contributed to a 529? All 50 states and Washington D.C sponsor 529’s. Each state has its’ own contribution limit. It is not unusual to be able to contribute to the plan until there is a total of over $350,000 in the plan. Up to $70,000 can be contributed to the plan in any one year. This is the gift tax yearly limit of $14,000 times five years. A gift tax return, however, does have to be filed in the first year of contribution and in each of the next four years if additional gifts are made to the same beneficiary. What are the advantages of a 529? There are multiple advantages of 529s. First, the contributions accumulate tax-deferred and become tax-free as long as the distributions are used to pay eligible college expenses. Second, the owner of the 529 has the ability to change the beneficiary by naming a new beneficiary or by rolling the 529 proceeds into a new account with a new named beneficiary. Third, a 529 plan can be set up in a high contribution limit state such as Florida, with a maximum of $418,000, to take advantage of putting more money into the plan even though the taxpayer lives in a low contribution state such as we do here in Michigan which has a maximum of $235,000. Fourth, there are no age limits for the owner or the beneficiary and the owner can be the beneficiary. Fifth, there are no income limits for the owner or the beneficiary that could phase-out the […]
Useful tax tips and information from Jerry Coon of Action Tax Service.
Last week was a good week for the Coon and the Cunningham families. Stephanie, our oldest daughter, and her husband, Devon Cunningham, had a baby boy, Rowan James, on Tuesday, the 11th. For both sets of proud grand-parents, Rowan is our first grandchild. The little fella might get spoiled just a bit. Since Stephanie and Devon live in Grand Rapids and Jim lives near Santa Barbara and Trudi lives in San Marcos, both in California, it will be up to Deb and me to spoil him in person. We can do that. I’m sure Jim and Trudi will find ways to spoil him from afar. Last week, before the appearance of Rowan, I wrote about how students and parents were going to pay for the cost of college. Hopefully, there would be scholarships and grants to cover all of the costs. Realistically, the number of students who get a full ride is minuscule. Most end up receiving a combination of scholarships, grants, parents’ out-of-pocket funds, and loans to cover the entire cost. This week, let’s talk, specifically, about how the federal government loan process works. Government student loans are called Direct Loans. The process for receiving a Direct Loan generally starts with filing a Free Application for Federal Student Aid (FAFSA). Direct Loans can be Subsidized, Unsubsidized, Plus, and Consolidated. 1. Direct Subsidized Loans are given to undergraduate students who, through the FAFSA, have shown they have a financial need. The advantage of a Subsidized Loan is that interest is not charged during the time that a student maintains at least half-time enrollment, during a grace period, and during a possible deferment period. Actually, interest is charged but the U.S. Department of Education pays the interest for the student during the stated periods. 2. On the flip side, Direct Unsubsidized Loans are not based on financial need. In these cases, the FAFSA generally must still be filed showing the student has no financial need based on the school’s cost. The disadvantage of the Unsubsidized Loans is that interest is charged from day one even when the student is in school and at all times thereafter. 3. Direct Plus Loans are unsubsidized loans that are given to parents of undergraduate students and also to graduate students. […]
Contrary to Governor Snyder’s seemingly best efforts, the cost of college tuition continues to sky rocket. The ways to finance that cost are familiar to all of us, i.e. scholarships, grants, and loans. In my book, scholarships and grants that aren’t required to be paid back are the very best method of paying for college. Of course, those scholarships and grants are highly competitive. Billions of dollars of public and private academic scholarships are awarded annually in the United States. Most colleges/universities/technical schools have scholarships ready to be awarded to a multitude of in-coming students with many of those scholarships being used to entice out-standing students to attend a school. The scholarships are awarded based on academic and other accomplishments as identified by the group awarding the scholarship. The competition can be intense. Each one of those scholarships, whether it is for $1,000, $10,000, or a full ride, for one year or all four years receives multiple qualified applicants with a panel of judges picking the successful applicant. Those scholarships allow untold numbers of students to be able to attend the college of their choice. The federal government has its’ own grant program. It is called the Pell Grant program with over 32 billion dollars of grants awarded yearly. That figure is subject to Congressional funding but it’s quite safe to say that Congress could give away as much money through Pell Grants as they wish to give away. Pell Grants are based on financial need eligibility with the maximum grant being $5,550 for the 2012-2013 school year. Each recipient must be able to demonstrate a financial need. Just as with the private scholarships, the Pell Grant program allows a large number of students to be able to attend the college of their choice. Academic accomplishment, however, does not factor into the equation. The hopeful recipient must file a FAFSA (Free Application for Federal Student Aid) that calculates the EFC (Expected Family Contribution) of the student and his/her family. The FAFSA can be filed as early as January 1 and can be filed as late as June 30. However, a few states, Illinois, Kentucky, North Carolina, South Carolina, Tennessee, and Vermont, administer funds on a first-come, first-served basis so, in those states, it definitely would […]
The World of Outlaws (WOO) Sprint Car circuit comes to Michigan once a year. It seems like they spend at least half of their year in the neighboring states of Indiana, Ohio, and Pennsylvania but Michigan racing fans get one chance to see the big hitters like Steve Kinser, Sammy Swindell, and Donny Schatz, without travelling out-of-state, when they visit I-96 Speedway in Lake Odessa/Clarksville. I’m not sure who at I-96 has the pull to get the WOO dirt-track dare-devils to come to Michigan but I’m glad they are successful at doing what they do. The annual visit happened last Saturday night. The early weather reports were terrible with upwards of 90% chance of rain. One of the oddities of sprint car racing is that even though they are racing on dirt, even small amounts of rain will make the track as slick as glass. Since the tires are as smooth as a baby’s behind, “slick as glass” only results in spin-outs and wrecks and with rain in the forecast, it didn’t look good. However, as the day went on, the chances of rain seemed to diminish. I waited as long as I dared before leaving for the track. It was still only partly cloudy when I arrived as the qualifying began. Talk about perfect timing. Just as I set down, Paul McMahon set a new track speed record by averaging just over 120 miles per hour. Two other drivers also broke the 120 mph speed mark. If the rain held off, it was going to be a fast night of racing. Since I was a late arrival, I ended up sitting low in the bleachers on the front stretch-third row from the bottom. As the cars passed, you can feel the 800 horsepower rumble from your toes right up through your fingers. Unfortunately, that’s not the only thing you felt as they passed by. You were also getting pelted by dust, chunks of dirt, and even some small rocks. Only rain could mess it up and it was getting more rainy-looking as the night wore on. The fellow sitting next to me had a smart-phone and called up WZZM’s weather. Just as we looked at the green on the radar, the track announcer said […]
“How much tax will I pay if I give, say $5,000, to my son/daughter/grandchild?” is one of the more common questions we receive during the year. This question is usually the start of an interesting conversation in which we get to ask more questions. For example, first, has the taxpayer given gifts to that child previously in the year? Second, is the taxpayer married and will the gift be a joint gift? Third, is the gift money or property? Fourth, is the taxpayer contemplating going into a nursing home and applying for Medicaid? Fifth, did the taxpayer fund a Section 529 Educational Savings Plan for that child within the past five years? Sixth, has the taxpayer filed a gift tax return previously? To fully explore the answers to our questions to the taxpayer, including the clients’ initial question to us, will take some time. Let’s go through the potential answers and discuss the situations. First, has the taxpayer given gifts to that child previously in the year? That is important to know because there is an annual gift tax exclusion amount. In 2013, that amount is $14,000. A taxpayer can make a gift of up to $14,000 to anyone during the year without having to file a gift tax return. The gift tax exclusion amount was $13,000 in 2012. If the gift tax exclusion amount is exceeded, a Gift Tax Return, Form 709, must be filed. That form identifies to whom the gift was given; when the gift was given; and the amount of the gift. If the total annual gifts are less than the exclusion amount, no gift tax form must be filed. For purposes of determining whether to file Form 709, it’s important to know the total gifts given to that child during the year. Second, if the taxpayer is married, each taxpayer’s gift tax exclusion amount is $14,000. The couple can give a total of $28,000 to any one person and still remain under the gift tax exclusion amount. The married taxpayers can write one check but they can make an election to split the check with each taking $14,000. A gift of $28,000 from mom and dad to a child covers most situations without having to file a Form 709. Incidentally, […]