As the parent of two young children, college planning is certainly on my mind, even at just 3-years and 6-months-old. While there are multiple options when saving for college, I’ve created 529 plans for my kids, which provide several benefits.
This post examines 529 plans and their benefits, followed by a description of how I’ve chosen to invest my 529 accounts. (more…)
I recently heard a TED Radio Hour story on NPR about Lux Narayan, an entrepreneur and data analyst. His organization spent two years analyzing the obituaries in The New York Times, looking for threads of commonality between the people who were featured. Then, his team created a word cloud of the text to show which words turned up most often.
One word showed up in large, bold type is help, because these people made a positive impact on the lives of others. They helped. (more…)
ABLE, short for Achieving a Better Life Experience Act, is a type of savings plan established in 2014 to provide support for those with disabilities. The accounts are similar to traditional 529 plans in that contributions can grow and be distributed tax-free for qualified expenses. The difference between a college savings 529 plan and an ABLE 529A savings plan is that ABLE funds can be withdrawn tax free to cover qualified disability expenses versus just qualified education expenses.
Does having assets in an ABLE account impact federal benefits?
Assets in an ABLE account won’t impact federal benefits unless the balance exceeds $100,000. Any excess beyond $100,000 in an ABLE account is considered personal assets, and once personal assets exceed $2,000 (such as in their checking account), Social Security benefits are suspended. This means that if assets in an ABLE account are $100,000 or more, plus checking or any other account surpass $102,000, Social Security benefits are halted. Social Security benefits resume once personal assets fall below $2,000 ($102,000 including $100,000 in ABLE account).
If you take distributions from your ABLE account for qualified housing-related expenses and retain them to be paid the following month (such as paying rent the following month), those distributions are countable resources for Social Security.
ABLE accounts do not impact Medicaid eligibility. However, upon the death of the recipient of aid, Medicaid can claim assets, such as those in an ABLE account, for payback. Outstanding qualified disability expenses, such as burial costs, receive priority over Medicaid claims. If Medicaid payback claims are greater than the remaining ABLE account, there is no further recourse against the disabled beneficiary’s other assets. (more…)
We all know the cost of raising a child is significantly higher than any tax benefit you may receive. Every dollar you save on taxes counts, especially when you have more than one child. Whether it’s through tax deductions, exemptions or special tax-advantaged accounts, taking the necessary steps can help reduce the cost of raising a child.
On a 2016 tax return, your spouse, any dependents and you receive a personal exemption that reduces your taxable income by $4,050 each. Let’s say you’re in the 28% marginal tax bracket and receive four exemptions for your spouse, two kids and you. This leads to a tax savings of $4,356 [($4,050 x 4 exemptions) x 28%]. When you start a family, make sure to adjust the tax withholding from your paychecks to include the correct number of exemptions. This reduces the tax withholding, thereby increasing your paycheck to account for the additional exemptions.
Child tax credits
For each dependent under age 17, you may be eligible to receive up to a $1,000 tax credit for each child. Credits are better than deductions and exemptions as they directly reduce the taxes you owe versus reducing your income that’s subject to tax. The credit amount starts to get phased out at income levels of $110,000 on a joint return, $75,000 for an unmarried individual and $55,000 for married filing separately. The credit is reduced by $50 for each $1,000 your household income exceeds these income levels, so it’s completely phased out at $130,000, $95,000 and $75,000, respectively. This credit is also partially refundable, meaning that in some cases, the credit may give you a refund, even if you do not owe any tax. This is also known as the additional child tax credit.
Consider a married couple with two children under age 10 and a household income of $108,000. This puts them near the start of the 25% marginal tax bracket after subtracting the standard deduction and exemptions. So the $1,000 credit for each child in the 25% marginal tax bracket provides for $8,000 ($2,000 / 25%) of income not to be taxed. Another way of looking at it is that this couple would owe $2,000 more in taxes if their dependents were age 17.
Dependent Care Flexible Spending Account (FSA)
The $5,000 that can be contributed to this special account is not subject to payroll taxes, federal taxes and most state taxes. It’s a reimbursement account for qualified childcare expenses for dependents up until age 13. This FSA can be used to pay for daycare, nanny services, summer day camps and many more. Make sure to spend the money in the account by year end as it’s a use it or lose it situation, where any leftover balance is forfeited. However, your plan may offer a grace period extension that could allow you to use the unused funds within 2 months and 15 days after the plan year ends. Unfortunately, dependent care FSAs are only available through employer benefits plans.
To illustrate the tax savings, consider a couple living in California with taxable income of $250,000. Their marginal tax rate is 33% to federal, 9.3% to California and 7.45% to payroll taxes (Social Security and Medicare), leading to an overall marginal tax rate of 49.75%. The $5,000 contributed to a dependent care FSA effectively saves you $2,488 on taxes for expenses you would be paying normally with after-tax dollars.
Child and dependent care tax credit
If your employer doesn’t offer a dependent care FSA, or you have more than one child, you may still be able to qualify for a tax credit to cover part of the costs for daycare. The maximum amount of expenses you’re allowed to claim is $3,000 for one child or $6,000 for two or more children. You can use 20% to 35% of these expenses to get a tax credit, depending on your income. If your income is $43,000 or more, then you can use 20% of these expenses. There’s no limit on income for claiming this credit. (more…)
As we get to know our clients, we always ask about the goals they have for their children and grandchildren. Over and over we hear a variation on a theme: I want them to have enough to do something, but not enough to do nothing. How do we go about teaching our kids and grandkids the value of a dollar, while giving them opportunities to have fun and enjoy what financial freedom can give? Moreover, how do we teach them about credit and borrowing money in a way that will encourage them to only spend what they have, and no more? We’ve found some useful tools to help young people learn the skills of budgeting and spending wisely, both with cash and credit.
To teach your teenager about spending, consider the American Express Serve prepaid debit card. The card requires no credit check or minimum balance, and has minimal fees. Parents can set up an account in their name, called a “Master Account,” and from there create up to four subaccounts for children aged 13 or older. Your child is issued a personal debit card with access to the funds in their subaccount, which can be used at merchants that accept American Express, as well as ATMs. They can also request funds from you, as well as send funds back from their account to yours.
Parents can view their child’s transaction history and set spending limits. Parents and children both have access to budgeting tools through American Express to see transactions divided into categories, or view each category as a percentage of their total spending. This is a great way to give kids power over how their allowance is spent, while being able to oversee spending and encourage good habits. These prepaid accounts can’t be overdrawn, offering another safeguard, and they do not affect the cardholder’s credit history.
Consider contacting your local credit union to see if they offer similar products with no fees.
What About Credit?
One of the best ways to teach your kids about credit, while also helping them build their credit history, is a secured credit card. Many major banks offer secured credit cards, which come with many of the same perks and services as traditional credit cards. Cardholders deposit funds into a checking or savings account. That deposit is then put on hold by the bank and used to secure the credit line on your credit card. A $300 deposit, for example, would become equivalent to a $300 credit line. The held funds continue to earn interest in the depository account, but can be spent using the secured credit card. Minimum payments are due monthly, and balances carried forward each month accrue interest charges just like with a traditional credit card. Balances and payments on a secured credit card are reported to the three credit bureaus, so making on-time payments is just as important.
After holding a secured card and making regular purchases and payments for a year, many banks will reassess the cardholder’s credit and, if strong enough, free up the funds used to secure the card, converting the account to a traditional card issued on credit. This type of card offers kids the ability to take time to learn about using credit cards, including the importance of making payments on time, as well as the process of billing cycles, interest charges, and spending only what they can afford to pay off each month. Some secured cards even offer rewards like traditional cards.
For something more traditional, college-age kids may consider the Discover it® for Students Card, which offers credit tracking and a reward for a good report card. A GPA of 3.0 or higher each school year will earn you $20 in rewards, and certain categories earn up to 5% cash back throughout the year. This card is also a great option for college kids who might be spending a semester studying abroad, as it charges no foreign transaction fee. Be sure to remind your student that while they may not see a fee for using their card abroad, they may still get less-than-favorable exchange rates on currency when using any credit card in another country. Lastly, in the event the card is misplaced, your student can freeze the card using an on/off feature accessible online and through the mobile app.
Cash and credit are both important tools for young people to feel comfortable using, and offering kids the freedom and responsibility to use them from an early age can make a huge difference in how careful they are with money down the road.