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Guarding Your Wealth for Senior Citizens
Grandparents May Avoid Capital Gains to Provide
College Funds
By Jeffrey D. Voudrie, CFP
Feb. 18, 2007 - For the last two decades, financial
planners, lawyers and accountants have recommended their clients take
advantage of the ‘kiddie-tax’ when selling investments to pay for their
child’s college education. The Tax Increase Prevention and
Reconciliation Act (TIPRA), which was signed into law in early 2006,
changed the ‘kiddie-tax’ rules. But you can still avoid paying capital
gains tax on the sale of appreciated assets if you plan ahead. Read on
to find out more.
There are many different ways that parents and
grandparents can set aside money to help fund a child/grandchild’s
college education. With tuition costs at public colleges approaching
$20,000 a year (far more than that at private colleges), it’s important
to take advantage of every opportunity that allows you to save on taxes.
Many are familiar with 529 Plans. These college
savings plans allow a parent or grandparent to gift up to $100,000 into
an educational savings account. The law allows them to do so without
being subject to Federal Gift Taxes. Like a 401(k), the donor can
allocate the funds within the 529 Plan between various investment
choices. Over time, these funds can grow substantially.
If the money was invested in mutual funds outside a
529 Plan, the owner would have to pay dividend and capital gains taxes
each year and when the funds were sold. That means that a significant
portion of the growth is lost to taxes. Those taxes are avoided with a
529 Plan. When the funds from a 529 Plan are used for qualified
educational expenses, there aren’t any taxes on the gains. Zip. Nada.
It’s not unusual for a parent or grandparent to
find their child is now a teenager and they haven’t set aside any money
for college. If a grandparent wanted to set aside a large amount of
money for their grandchild they might face gift taxes. The ability to
transfer $100,000 all at once into a 529 Plan allows a parent or
grandparent to ‘catch-up’ without being subject to gift taxes.
Parents and grandparents can also take advantage of
the ‘kiddie-tax’ to avoid taxes on investments. Prior to TIPRA, a child
under 14 years of age could receive $800 in income and it not be subject
to tax. That income could be in the form of wages, interest, dividends
or capital gains. The next $800 in income was taxed at the child’s tax
rate and anything over that amount was taxed at the parent’s tax rate.
The reason amounts over $1600 were taxed at the
parent’s tax rate was because parents in high tax brackets were using
this loophole to reduce the amount of taxes on the sale of appreciated
assets. Instead of selling a stock with a gain, they would gift it to
their child. Since the child had less income, the gains were taxed at a
lower rate. This was a way to reduce taxes on securities sold to fund
college expenses.
The old ‘kiddie-tax’ rules only applied for
children under 14 years of age. Once the child turned 14, earned income
became taxed at the child’s rate, not the parents. So parents waited
until the child was 14 to gift assets with gains over $1600.
TIPRA changed the ‘kiddie-tax’ by applying those
rules until the child turned 18. And made them retroactive to January 1,
2006. Under the new rules, income earned by children under 18 over $1600
is taxed at the parent’s tax rate. You might think that this does away
with the incentive to gift appreciated assets to minors, since children
can no longer sell them and pay taxes at their lower rate. But it
doesn’t.
Between 2008 and 2010, TIPRA rules state that there
are no capital gains taxes for individuals with $30,650 or less in
income. That means that a parent or grandparent can go ahead and gift
appreciated assets to their minor children or grandchildren now, and as
long as those assets are sold between 2008 and 2010, capital gains taxes
would be avoided on over $30,000 of any gains (minus any other income
the child may have earned that year).
The bottom line is that there are legal ways to
reduce or eliminate taxes on the funds used for a child’s education. You
just have to take a little time to educate yourself in the process.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For bookings, email
jeff@guardingyourwealth.com.
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