Tax Planning – Family and Education Related Opportunities

CPA services provided by Contryman Associates, P.C., Investment Adviser services are offered through Contryman Wealth Advisors

Services designed to capitalize on provisions of current tax laws relating to families and education expenses to help minimize income taxes by taking possible deductions, credits, and exemptions.

The increasing costs of higher education have made education planning an important aspect of personal financial planning. Frequently, education planning does not receive proper attention because cash outlays may not be incurred for many years and are low on the priority list. Often, families have made mental commitments to a certain standard of education for their children but have done little planning for when the tuition bill arrives. This tendency to postpone the issue may eliminate several effective education funding strategies that offer opportunities for tax reduction and financial gain when implemented early.

Many of the strategies discussed include shifting income or assets to children. For clients who may be eligible for college financial aid, this strategy can have a negative impact on the amount of such aid, since a greater percentage of a child’s income and assets is considered in financial aid formulas than if such income and assets were attributable to the parents. However, high-income families may be eligible for little, if any, financial aid, so strategies that maximize the family’s available college funds may be the best overall plan.

Some Possible Opportunities:

  • Employing a child in the family business,
  • Gifting appreciated property to a child,
  • Using trusts, partnerships, & S-corporations to shift income to children
  • Funding for future college costs using 529 savings accounts, Roth and/or traditional IRA accounts, and U.S. Savings Bonds.

Note that the examples mentioned here are only a very few of the tax planning strategies that may apply to your situation to help reduce your tax liability.

Case Example:
Contryman professionals determined that, under current tax law, we would expect there to be an estate tax liability for a 63-year old business owner client. The client has two children – a daughter currently in college, and a son, age 5, from a second marriage. We looked at a number of possibilities to help minimize the estate taxes that would be owed.

One alternative suggested by Contryman professionals was to fund a Section 529 Education Savings Plan for the younger child. Because of the father’s financial status, the child is unlikely to be eligible for financial aid when he goes to college. A 529 Plan would allow “college money” to be put aside and to grow tax deferred. Provided that it is used for education purposes there are no tax consequences when it is withdrawn. By funding the 529 Plan at a higher level, at or just below gift tax limits, the fund would get a jump start and that amount would be taken out of the owner’s estate. Up to $60,000 can be placed in a Section 529 plan because of provisions that allow five years of gifts to be lumped together ($12,000 is the annual gift exclusion for 529 Plans for 2006). If funds for the 529 Plan come from the business owner’s current taxable investments, funding the 529 Plan might also reduce his current income tax. When the child is of college age, if he does not need the money (i.e. receives scholarships or chooses not to attend college), the money in the 529 Plan can be used for the education of other children of the business owner or future children of the child for whom the account is established. All the while it will continue its tax deferred growth.

Although this business owner has potential estate tax issues, his current income is fairly modest, slightly above the level at which many education benefits are limited by current tax law. By strategically planning to manage income and expenses prior to the end of the year, we can advise the business owner to help assure that those limits are not exceeded. If this is successful, he may be able to deduct up to $3,000 of the child’s college costs. This has the potential to reduce his tax liability by as much as $1,000.

This case study may not be representative of the experience of, or the results realized, by other clients. There is no guarantee of future performance or success.

For more complete information about the 529 savings plan, including investment objectives, risks, fees and expenses associated with it, please read the issuer’s official statement. The issuer’s official statement can be obtained from your financial advisor. Please read it carefully before investing.

Please consider, before investing, whether your home state offers any state tax or other benefits that are only available for investments in your state’s qualified tuition program. Other benefits may include reduced or waived program fees, matching grants, and scholarships to state colleges. Any state-based benefit offered with respect to a particular 529 college savings plan should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances and you also may wish to contact your home state or any other 529 college savings plan to learn more about the features, benefits and limitations of that state’s 529 college savings plan.

Additionally, please note that unless Congress takes action, earnings withdrawn from a 529 plan account after 2010 to pay for qualified higher education expenses will be subject to federal income tax.

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