General Principles Chapter 6

Question 1

Needs Analysis Steps

Answer 1

1. determine cost of college first year (fv)
   pv - current cost of 1 yr college
   n - how many years until starting college
   i/yr - rate that college cost grows at
   fv solve
2. determine 4 year cost of college (lump sum amt future value)
   pmt = fv from above
   n= 4 (yrs of college)
   i/yr = real rate of return (use parents required ror and rate that college cost grows at
   pv solve

determine savings amt

3. find lump sum needed today (how much to invest today)
   fv = pv from previous step
   n = years until college
   i/yr = after tax return (we already accounted for inflation so just need to know parents ror)
   pv solve
4. find pmt amounts today to save every year (either beginning or end)
   fv = pv from step 2
   n = years until college
   i/yr = after tax return
   pmt solve

Question 2

4 Funding Strategies

Answer 2

UTMA/UGMA
EE Edu Bonds
Coverdell Savings
529 Plans

Question 3

Grants & Loans - Wealthy

Answer 3

wealthy parents are a plus
parent plus loans

Question 4

Grants & Loans - PooriSh

Answer 4

70k < income
pell grants
supp education opp grant
subsidized stafford loans

Question 5

American Opportunity Credit

Answer 5

first 4 years of college only
magi phase outs given on exam
2k + 25% of next 2k expenses (max 2500 credit)
at least a half time student
expenses paid w/ grants or schollys dont count
expenses for room n board dont count
expenses include tuition, fees, course material
cannot combine credit w anything else for the same child

Question 6

Lifetime Learning Credit

Answer 6

all higher ed - undergrad & grad
2k max
20% of first 10k expenses
claim for unlimited period of time as long as qualifying expenses are incurred
magi phaseouts give on exam
cannot combine credit w anything else for the same child

Question 7

Coverdell Withdrawal

Answer 7

use before student is 30
magi phaseouts on tax sheet

Question 8

529 Distribution

Answer 8

no phaseouts

Question 9

Grad Year Options

Answer 9

fulbright scholarship, stafford loan, 529 dist or coverdell withdrawal

Question 10

Gifts of Present Interest

Answer 10

UTMA/UGMA, 529, Coverdell

Question 11

Not a Complete Gift

Answer 11

ee edu bonds if parent owns the bond

Question 12

529 Plan types

Answer 12

prepaid edu or college savings

Question 13

Investment Return for 2 Types 529

Answer 13

CS: market based performance
PT: tracks tuition inflation

Question 14

Risk Tolerance for 2 Types 529

Answer 14

CS: risk tolerant
PT: risk averse

Question 15

Effect on Fin Aid for 2 Types 529

Answer 15

both: considered parents assets
greatly reduces students eligibility in needs based financial aid

Question 16

Enrollment for 2 Types 529

Answer 16

CS: open enrollment
PT: limited

Question 17

Covered Edu for 2 Types 529

Answer 17

CS: undergrad & grad
PT: MAY be undergrad only

Question 18

Use Restrictions for 2 Types 529

Answer 18

CS: can include room & board
PT: generally limited to tuition and mantatory fees

Question 19

Coverage by State for 2 Types 529

Answer 19

CS: avail in whatever state
PT: may restrict out of state cost

Question 20

School Choice for 2 Types 529

Answer 20

CS: does not impact investment
PT: impacts investment return

Question 21

Refunds for 2 Types 529

Answer 21

CS: return of investment, all earnings subject to 10% penalty
PT: investment + low rate of interest

Question 22

Gifting

Answer 22

18k without gift tax filing (per estate tax law) per donor
OR
use up to 5 years of exemption at once and do not gift anymore during that period 18k x 5 = 90k

Question 23

Gifting Through Trust

Answer 23

5 year averaging not available

Question 24

Rollover Rules

Answer 24

not considered a distribution but only one transfer to a different institution every 12 months

Question 25

529 Control of Assets

Answer 25

beneficiaries do not gain control over assets

Question 26

529 Bene Change

Answer 26

in same family in same generation = no taxable gift generation below = taxable gift

Question 27

k-12 529 Withdrawals

Answer 27

under TCJA, can withdraw up to 10k from 529, which is new and may eliminate the need for coverdell ESA

Question 28

Student Loan 529 Withdrawals

Answer 28

may allow to pay for student loans up to $10k lifetime limit

Question 29

Coverdell ESA Contribution Info

Answer 29

2k per STUDENT not per donors (anyone can contribute) not deductible contribute up to tax filing due date phase out

Question 30

Coverdell ESA Use Info

Answer 30

may be used for elementary/secondary education\ tuition, fees, tutoring, books, special needs stuff, room and board, uniforms, transfportation, after school programs, computer/equipment needed

Question 31

Coverdell ESA Age Limit

Answer 31

all funds must be used before student reaches 30, unused contributions remain in the pln

Question 32

Can you maintain a coverdell esa & 529

Answer 32

YES

Question 33

UGMA Investments

Answer 33

cash type: ee bonds, stocks , mutual funds, CDs savings accts (remember: UGMA = ugly = no beautiful real estate)

Question 34

UTMA Investments

Answer 34

UGMA investment types + real estate and LPs

Question 35

UGMA Transferred to Child

Answer 35

at age of maturity (depending on state) 18 or 21 (remember: UGMA = ugly = younger kids are ugly)

Question 36

UTMA Transferred to Child

Answer 36

up to age 25

Question 37

UGMA/UTMA Gift Tax

Answer 37

gift of present interest 18k exclusion

Question 38

UGMA/UTMA Taxation

Answer 38

subject to kiddie tax

Question 39

UGMA/UTMA Fin Aid

Answer 39

assets count as owned by child

Question 40

Purpose of Kiddie Tax

Answer 40

discourage shifting income to kids (who are in a lower bracket) as a tax avoidance technique

Question 41

When does kiddie tax apply for kids with unearned income

Answer 41

when kids unearned income (i.e. interest income) is greater than $2600 w/ one living parent

Question 42

Kiddie Tax Calculation

Answer 42

if it applies: 1. 1300 standard deduction - i.e. no tax applied to first 1300 of income 2. next 1300 taxed at childs rate 10% ($130) 3. anything over 2600 taxed at parents rates if child has earned income: step one deduction is earned income + 450

Question 43

UGMA/UTMA Transfers

Answer 43

some states allow transfers from ugma/utma to 529s CHILD STAYS OWNER BENE CANNOT BE CHANGED

Question 44

EE Bonds Features

Answer 44

purchased in parents names redeemed in year that parent pays higher edu expenses NO ROOM AND BOARD interest is fully exempt from fed taxes

Question 45

Coordinate Tax Credits w/ Coverdell

Answer 45

cannot claim tax credit on the same dollars, can claim one of them if thre are sufficient expenses to cover both

Question 46

Coordinate Tax Credits with 529

Answer 46

claim credit for expenses in addition to wha distribution from 529 was for

Question 47

Student Loan Interest Deductions

Answer 47

above the line eduction for interest on qualified education loans max 2500 phaseouts on exam

Question 48

Pell Grants

Answer 48

7k max undergrad only formula: cost of attendance - expected fam contribution efc 6600

Question 49

Subsidized Stafford Loans

Answer 49

for students who show financial need after efc & pell grant

Question 50

Supplemental Edu Opp Grants

Answer 50

for pell grant recipients and up to 4k a year

Question 51

Public Service Loan Forgiveness

Answer 51

government and nonprofit employees forgiven after 120 payments , or 10 years as a firefighter, teacher, military, govt nursing

Question 52

Total and Permanent Disability Discharge

Answer 52

if you cannot work due to total and permanent disability, balance may be canceled

Question 53

Teacher Loan Forgiveness Program

Answer 53

5k-17.5 in loans forgiven (drect subsidized and unsubsidized, not plus) - elementary/secondary or low income agencies

Question 54

Income-Driven Repayment Plans

Answer 54

based on income