Unit 9 - Education Planning, Savings and Spending Techniques Flashcards Preview

CFP 1 - Fundamentals and Ethical Considerations > Unit 9 - Education Planning, Savings and Spending Techniques > Flashcards

Flashcards in Unit 9 - Education Planning, Savings and Spending Techniques Deck (30):

Education needs analysis process

Three Steps.

1. Calculate the future cost of the first year of college (merely calculating for the future value of a singel sum)

2. Determine the total sum required (this is solving for the present value of any annuity due)

3. Determine the required savings payments (this is solving for an ordinary annuity payment or an annuity due depending on client preference)


UGMA / UTMA facts

Custodial accounts for minors

-When child attains age of majority, either 18 or 21 depending on state, the child can gain access to the account regardless if the money is used to fund college or not.

-Allow for some income shifting to the child.

-UGMA's cannot hold real estate, UTMA's can hold real estate.


Define the kiddie tax

taxation on unearned income of a child under age 19, or under age 24 if the child is full time student. Full time students under age 24 providing more than one half their owne support fro earned income are not subject to the tax.


Facts for Series EE or I Bonds to fund a childs education

Special tax advantages are provided to certain owners of Series EE bonds who qualify Any income from Bond redemption can be excluded from income if used to fund higher education Bond must have been issued prior to 1989 to and individual who has reached age 24 before date fo issuance


Qualified higher education expenses for Series EE bond use

Tuition and fees (not room and board) required for enrollment at any eligible educational institution incurred by

  • -The tax payer
  • -the taxpayers spouse
  • -any dependent of the tax payer claimed for income tax reasons.


Phase out for Series EE bonds

Excludable amoutn is subject to phase out during the years when the bonds are cashed and the tuition is paid. Above the phase out ranges no exclusion is allowed.


Coverdell Education Savings Accounts (ESA) facts

  • Contributions cannot be more that $2000 per year egardless of the number of donors
  • - Contributions are not tax deductable but the earnings accumulate tax free
  • -The ESA beneficiary must be under age 18 when contributions are made.
  • -Money can be used for k-12 educational expenses including tuition and room & board.
  • -All funds within an ESA must be used before the student reaches the age of 30.
  • -Owner has the right to change the beneficiary to another family member of the original beneficiary.


IRC Section 529 Plans (also known as Qualified Tuition Program (QTP)

-that ability to make contributions regardless of the constributors AGI, tax fee earnings growth.

-Tax free withdrawals to the extent they are used to pay qualified higher education expenses

-If withdrawals are not used for education, subject to 10% penalty

-Contribution limits vary from $100,000 to $250,000 depending on state. Beneficiaries of 529's do nto gain control of the assets at the age of majority as with custodial UGMA or UTMA accounts.

-may be rolled to anothe family member if original beneficary does not attend college.


529 Plan Estate planning facts

Federal gift tax rules apply -Contirbutor is permitted one $65k contribution (13k contribution over 5 years) If split with spouse can contribute a one time $130,000 (65x2) gift.


Define a prepaid tuition plan

Permits contributors to prepay future tuition at todys tuition rates or purchase tuition credits to apply to future tuition costs. Usually requires the beneficiary to go to any public college or university within the state( or specific private institution) that established the QTP. If the student chooses not to attend covered college, some of the money can be used but not all of it.


Define a college savings plan

Offered by only state, state sponsored organizations and eligible institutions. -contribution rules are the same as those for prepaid tuition plans. -tuition is not being prepaid , but rather a tax advantaged savings plan is established from which free distributions are made to pay for qualified educational expenses. -investment options include Stock mutual funds, bond mutual funds, and money market funds. -some plans offer aged based portfolios that shift over time


Advantages of College savings plans over prepaid tuition plans

1. They do not restict where the child may attend college.

2. Permit open enrollment and is available for instate or out of state schools without loss of account value.

3. Maybe used for expenses beyone tuition and mandatory fees.


Qualified educational expenses for College Savings Plans

  • Tuition
  • Books
  • supplies
  • equipment required for attendence
  • room and board.


Performance of college savings plans

Unlike prepaid tuition these plans are not guaranteed by the state. If the contributor is unhappy with the performance of the plan the only alternative is to roll the money into another plan.


Define Expected Family Contributions (EFC)

The amount of money that the family is expected to contribution towared the cost of a students education. This term is used on the FAFSA form which is the application for federal student aid.


List the 4 separate calcuations that determine EFC

1. Parental income- includes taxable and non taxable income from the previous year

2. Parental assets - Includes everthing except home equity, cars used for regular transportation, the cash value of life insurance policies and the parents accured value in life insurance plans (529 plans are considered assets of the parent)

3. Student income - Taxable and non taxable income from previous year

4. Student Assets - includes everything the student owns or has been saved on there behalf (e.g. Custodial accounts)


Define a subsidised Stafford loan

This is a need based loan on which the US departent of Education pays the accrued interest while while the student is in school and during any deferrment period


Define and unsubsidized stafford loan

This is a non need based loan on which the interest begins to accrue as soon as the funds are disbursed. However, the interest may be capialized while the student is in school and during any deferment period.


Define a Parent Loan for Undergraduate Students (PLUS) loan

This is a non need based load available to parents of depended undergraduate students. If the parent doesn not qualify for financial aid due to a high income level this is the only federal loand that will typically be available to assist in the payment of college expenses. The only requirement is that the parent meets the federal standards of creditworthiness.


Define a Perkins loan

Campus based federal loan in which the institution determines whether the student needs the loan. If it is determined that they do, they can borrow up to one specifed amount per year for undergrad study and a higher different amount for graduate study. The perkins loan has high interest and a longer deferral period than stafford loans.


Define a Pell Grant

Federal Grant available to undergrads in which there families EFC does not exceed a specified amount.


Define a Supplemental Educational Opportunity Grant (SEOGs)

Federal grants given to students with priority given to students who revieved Pell grants


Define a Federal work study program

Provide students part time jobs while attending college. In turn the institution disburses funds to the student.


Define an employer assistance exclusion

An employer may provide unlimted amount of educational assistance to an employee as long as it is job related.  Section 162 benefit. 

An employer may alos provide up to %5250 of non job related eduacational assistance to an employee during any one year as a tax free employee benefit.  Can be used for graduate or undergraduate study. 


Name the income tax credits and deductions in Education planning

  • Two major Credits
    • The Ameirican opportunity tax credit
    • The lifetime learning credit
  • One Deduction
    • Deduction for student interest.


American opportunity tax credit facts

  • Available for the first 4 years of childs college
  • tax credit (dollar for dollar reduction of tax liability)
    • 100% of first $2000 of qualified expenses (tuition and fees, course materials, NOT ROOM AND BOARD)
    • 25% of next $2000 qualified expenses
  • Maximum credit of $2500 with $4000 in expenses
  • Up to 40% of credit is refundable
    • No refundable credit for taxpayer who is child
      • Under age 18 (Or student whis at least 18 and under age 24 whos earned income does not exceed half of there own support
      • Witih at least one living paren
      • Who does not file a joint return
  • Student must be enrolled in an educational program leading to a degree, certificate or other recognized credential
  • Must be enrolled in at leas half the minimum hours of full time student
  • Note that $2500 maximum credit is per student, and not per family or income tax return filed.
  • Subject to phaseouts
  • Not availble to married tax payers filing separate returns


Lifetime learning Credit facts

  • May be claimed for an unlimited number of years while the student is pursuing and educational course
  • Credit permitted is 20% of the first $10,000 of qualifed tuition expenses (Maximum of $2000) paid for in any year in which the American opportunity tax credit is also not claimed for the same student.
  • Maximum nonrefundable credit of $2000 per return or per family, not per student.
  • Phase out limitations for 2012
  • Does not require enrollment in a degree program or at least half time enrollment
  • more flexibility thatn American Opportunity tax credit



Major differences between the American opportunity tax credit and the lifetime learning credit Chart


Deduction for Student Loan Interest Facts

  • Allowed to the student or parent (if PLUS Loan) for interest paid on education loans
  • The interest paid by individuals during the tax year on any qualified educational loan is deductable as an adjustment for AGI (Above the line dedcution
  • Up to a maximum of $2500 per year
  • Subject to phase outs
  • Student borrowers may generally deduct interest over the term of their loan obligation
  • Subject to the $2500 annual limitation


Coordination of Tax Credit rules

  1. A Taxpayer can claim AOTC or LLC for the taxable year and can also exclude from gross income amount distributed from a section 529 plan or coverdell ESA if the 529 plan or Coverdell ESA tax free distributions ar enot used to pay the same expenses for which either the AOTC or LLC ws claimed
  2. The american opportunity tax credit and the lifetime learing credit may not both be claimed in the same year for the same student
  3. taxpayers may waive the AOTC for LLC even if they qualify for one of the credits
  4. Student loan interest deduction may be used in combination with any of the other education tax benefits.
  5. TEST TIP : When answering exam quations asking about the coordination rules, do not use any combination of the AOTC or the LLC with a coverdell ESA or Section 529 plan tax free withdrawal in payment of the same expense and you will likely answer the questions correctly