When it comes to educating our children, what can we do in this economic climate? The answer is always right in front of us. We merely need to look, listen, and seek useful and understandable information. Welcome to my presentation and the MWIB series regarding financial studies. Please read and learn and be sure to ask lots of questions.
You may not be aware, but the “kiddie” tax will be extended to the age of 18 beginning in 2006 for those who haven’t heard. Unearned income such as interest and dividends will be taxed at the parent’s highest marginal tax rate if a child has more than $1,600 in unearned income. Children under the age of 14 were admitted until 2006. The goal was to try passing income down to the children to take advantage of the reduced tax rates to help with funding education. This can’t happen because of the child tax.
To tell you the truth, I never thought much of this method anyway. Leading my clients through the maze of financial plans with an eye on the broader picture is something I do every day. The 529 plan has the same effect on me. The 529 plan performs admirably when used appropriately. When it comes to estate planning, I believe the 529 plan offers further asset protection and wealth preservation for those who are well-off. There is less of a concern for me about using the same strategy in multiple portfolios because of one’s wealth. Retirement plans and 529 plans will use the same investment strategies. Since most middle-class families can’t afford to duplicate their financial plans, I think this is ridiculous. Instead, adding to one’s portfolio outside of a retirement plan is a better way for a middle-class family to save for their children’s education. It’s best to use a mix of tax-free and high-growth vehicles to keep tax liabilities to a minimum. In order to avoid paying income tax in the first place, it is important to keep accurate records and grasp topics such as the wash sale laws and capital gain and loss netting (see my article and instructional CD regarding capital gain and loss issues). The 529 plan, in my opinion, is also beneficial to grandparents who want to make contributions.
I’ve had enough of my opinions on the 529 plan. Here are some alternative methods of instructing our youngsters. Is it possible that someone in the family runs a business? I really, truly like the concept of employing children. In order for the child to receive remuneration, he or she must perform a service of some kind. Let’s say you have a child who earns $5,000 a year in 2006. The standard deduction happens to be the same as this. Because of the standard deduction, sonny lad will have no taxable income and his parents’ business will get a tax break. Junior can then utilise this money to establish a college portfolio. Additionally, there is no social security tax to be paid if the parent’s business is not established and the child is still a minor. I’m in awe of this material. This approach appeals to me even if the child is of legal drinking age. Hope and lifetime learning credits may not be available to parents whose adjusted gross income is too high. Aside from providing us with a tax break at the business entity level, paying the student will provide them with income. It’s important to keep in mind that the compensation you receive should be fair compensation for the work you’ve done. In the next year, the student will file their own tax return, taking advantage of the standard deduction and one of the education credits. You’ll note that I omitted to mention the possibility of an exemption. This is because the parent is the only one who may claim the exemption because they are the ones who sustain the child. In exchange for the child’s usage of the educational credit, the parent will forfeit their exemption. Keep in mind that by paying the child’s wages through the firm, the parent has already benefited from a tax deduction.
A business may or may not exist. In this instance, I believe the parents should construct their own portfolio based on theories from both inside and outside the realm of traditional pension plans. Understanding capital gain and loss laws can help limit tax exposure outside of the retirement plan and allow for the accumulation of wealth and the availability of funds for the assistance of one’s children. If tax planning requires, the parents may be able to use the educational credits themselves, but they can also transfer them to their child. If the parent’s adjusted gross income is too high, the student may be able to receive educational credit for the time he or she spends in school.