Unit 10

Which of the following statements regarding a Uniform Transfer to Minors Act (UTMA) is CORRECT?

Custodial account assets are considered an asset of the child and are considered in determining financial aid. A portion of the income within a UTMA may be taxed at the parents income tax rates and the account is subject to income tax.

UGMA 529 accounts or UTMA 529 accounts.

Most states that have previously established a Section 529 QTP plan will permit a con- tributor to roll over UGMA or UTMA proceeds to the Section 529 plan account on behalf of the child

Which of the following is (are) characteristics of Perkins loans?

Perkins loans are funded by the federal government. Perkins loans are given on a needs basis. Different amounts are available for undergraduate and graduate stud

Which of the following statements regarding the use Series I bonds for education funding is (are) CORRECT?

Redemption proceeds from Series I bonds may be tax free if they are used for qualified education expenses. The tax advantages of Series I bonds when used for education funding are phased out at certain levels of adjusted gross income. Series I bonds are issued at face value and have no guaranteed rate of earnings. The annual interest rate reflects the combined effects of a fixed rate and a semiannual inflation rate.

Which of the following statements regarding the income tax deduction for student loan interest is (are) CORRECT?

The deduction is subject to phaseout based on the taxpayer's adjusted gross income. the deduction for student loan interest is taken as an adjustment to adjusted gross income (an above-the-line deduction) and is available regardless of whether the taxpayer itemizes deductions. Statement 3 is also incorrect; the maximum deduction is $2,500 per year.

Supplemental Educational Opportunity Grants (SEOGs)

These are federal grants given to students, with priority given to students who also received Pell Grants.

Federal Work-Study Programs.

These programs provide students with part-time jobs while attending college. In turn, the institution disburses the earned funds to the stu- dent.

Pell Grant.

This federal grant is available to undergraduates only and is available if the family's EFC does not exceed a specified amount, as determined annually.

Parental assets

This includes almost everything owned by the parents with the notable exceptions of home equity, cars used for regular transportation, the cash value of a life insurance policy, and the parents' accrued benefit or account balances in any retirement plans.

Parental income.

This includes taxable and nontaxable income from the year preceding the award year and is reduced by a specified income protection allowance, depending on the parent's income level, and federal income and Social Security taxes.

Student income

This includes taxable and nontaxable income from the year preceding the award year, reduced by an income protection allowance and taxes.

Student assets

This includes the value of everything the student owns or that has been saved on his behalf (e.g., a custodial account).

Subsidized Stafford Loan

This is a need-based loan. The U.S. Department of Education pays the accrued interest while the student is in school and during any deferment periods.

Unsubsidized Stafford Loan.

This is a non-need-based loan. Interest begins to accrue as soon as funds are disbursed. However, the interest may be capitalized while the stu- dent is in school and during any deferment period.

Parent Loan for Undergraduate Students (PLUS).

This is a qnon-need-based loan available to parents of dependent undergraduate students. If a parent does not other- wise qualify for financial aid because of a high income level, this is the only federal loan that will typically be available to assist in the payment of college education expenses. The only requirement is that the parent or borrower meets federal standards of creditworthiness.

Perkins Loan.

With this federal loan, the institution determines whether the student needs the loan. If a determination is made that the student does, he can borrow up to one specified amount per year for undergraduate study and a higher, different specified amount per year for graduate study. The Perkins loan has the advantage of a low interest rate and a longer deferral period than Stafford loans.

custodial accounts

a very popular way of income shifting and saving for college in a child's name.

American Opportunity Tax Credit

is intended to help families pay for post-sec- ondary education for their children. This credit is extended to the first four years of post- secondary education. In 20164, the American Opportunity Tax Credit reduces a family's tax. Up to $2,500 credit per student Available first four years of postsecondary education Student must be pursuing an undergraduate degree or other credential Student must be enrolled at least half time for academic period No felony drug conviction is permitted on student's record, or credit is unavailable

Lifetime Learning Credit

may be claimed for an unlimited number of years while the students are pursuing their educations. Up to $2,000 credit per taxpayer return Available for all years of postsecondary education and courses Student does not need to be pursuing an undergraduate degree or other credential Credit is available for one or more courses without regard to enrollment status Felony drug conviction rule does not apply

College savings plans

may be offered only by states, state-sponsored organizations, and eligible educational institutions. The contribution rules are the same as those for prepaid tuition plans. In this type of plan, tuition is not being prepaid, but, rather, a tax advantaged savings plan is established from which tax-free distributions are made to pay for qualified education expenses. Market-based performance Suitable for risk-tolerant investor No state-guaranteed return on assets Open enrollment Available for out-of-state tuition costs without any refund difference In addition to tuition and mandatory fees, covers books, required supplies, and room and board (students attending at least half time)

prepaid tuition plan

permits contributors (usually parents) to prepay future tuition at today's tuition rates or purchase tuition credits (units) to apply to future tuition costs Inflation-based performance Suitable for risk-averse investor May offer state-guaranteed return on assets Usually restricted enrollment options May restrict out-of-state tuition costs and, if less than in-state, may not refund difference Covers tuition and mandatory fees only

Coverdell Education Savings Account (CESA)

serves as an incentive for parents, grandparents, and others to save for a child's education expenses.

Section 529 plan, also known as a Qualified Tuition Program (QTP)

tax- advantaged program that helps families save money for college expenses. offers significant income tax benefits, including the ability to make contributions regardless of the contributor's AGI, tax-free earnings growth, and tax-free withdrawals to the extent they are used to pay qualified higher education expenses. If withdrawals are not used to pay qualified higher education expenses, the income portion is included in the gross income of the beneficiary and generally subject to a 10% penalty tax.

Expected Family Contribution (EFC)

the amount of money that a family is expected to contribute toward the cost of a student's college education; the term is used on the Free Application for Federal Student Aid (FAFSA), which is an application that a student files for federal student aid.

All of the following statements regarding college savings plans as education savings techniques are correct

they do not provide a state-guaranteed rate of return. B) the contribution and distribution rules are the same as for qualified state prepaid tuition programs (QTPs). C) they are suitable for risk-tolerant investors. college savings plans do not restrict where the child may attend college. College savings plans permit enrollment at out-of-state universities or private colleges.

Rules or provisions are included in the Internal Revenue Code specifying how all of the favorable education tax benefits may be used together by an eligible taxpayer.

■ A taxpayer can claim an American Opportunity Tax or Lifetime Learning Credit for the taxable year and can also exclude from gross income amounts distributed from a Section 529 plan or Coverdell ESA, but only if the Section 529 plan or ESA tax-free distributions are not used to pay the same expenses for which either the American Opportunity Tax or Lifetime Learning Credit was claimed. ■ The American Opportunity Tax Credit and Lifetime Learning Credit may not both be claimed in the same year for the same student. ■ Taxpayers may waive the American Opportunity Tax or Lifetime Learning Credit even when they qualify for one of the credits. This may be the case if the tax savings resulting from the credit is less than the savings from the income tax-free treatment of Section 529 plan withdrawals. ■ The student loan interest deduction may be used in combination with any of the other educational tax benefits, such as the American Opportunity Tax Credit or the Lifetime Learning Credit.

if two or more children in the same household incur qualified expenses in the same year:

■ ■ ■ the parents may claim a Lifetime Learning Credit for the family; an American Opportunity Tax Credit may be claimed for each eligible child; or a Lifetime Learning Credit may be claimed for one child and an American Opportunity Tax Credit may be claimed for each of the other eligible children.