Broker Check

July 31, 2008

Noncustodial Parent Loses Exemption

          A divorce court gave the ex-wife custody of their child but let the father claim a dependency exemption for the child in odd-numbered years providing he made timely child support payments, which he did. Although his ex refused to give him a signed Form 8332 for those years, he claimed the exemption, attaching the divorce decree, to his tax return.
          Because the ex-wife had not actually signed the decree the Tax Court said it was not a valid substitute for Form 8332 and denied him the exemption. Lease, TC Summ. Op. 2008-73

Raising Cash

          In tough times by borrowing from a qualified pension plan can make sense for individuals looking to pay for a child’s college tuition, financing a much needed home repair or simply keeping up mortgage payments while a family goes through a rough patch, like a spouse’s unemployment. Compounding the misery is the fact that many people have locked away the lions share of their savings in a tax favored retirement vehicle, like a company profit sharing or 401(k) plan.
          Borrowing from a company retirement plan usually is quick, can be requested for any reason, does not affect a person’s credit rating and often will cost less than a bank loan. What is more, the interest paid on the loan will be funneled back into the plan participant’s account and continue to grow on a tax deferred basis. The loan also will not have any tax consequences if it is set up properly.
          Plan participants, however, should not be lulled into complacency by the idea that they are really just borrowing from themselves. A plan loan must be timely repaid or there will be unattractive tax consequences.
          The loan payment cannot exceed the lesser or $50,000 or ½ of the present value of the employee’s non-forfeitable accrued benefit under the plan, but a loan of up to $10,000 is allowed even if it is more than one-half the employee’s accrued benefit. If a plan loan when added to the employee’s outstanding balance of all other plan loans exceeds these limits, the excess is treated and taxed as a plan distribution. (Note: the lending limits for victims of Hurricane Katrina, Rita or Wilma are doubled to $100,000). This means the distribution will be taxed as ordinary income and potentially subject to the 10% premature distribution penalty.
          The plan loan generally must be repaid within five years in substantially level payments made not less frequently than quarterly over the term of the loan. The five year limit does not apply to a plan loan used to buy a dwelling unit which is to be used as the participant’s primary residence.
          There are other considerations with regard to documentation requirements, deductions for interest paid, nonpayment of plan loan, and loan offset distributions. IRC 72
          If you are considering the foregoing, you might want to contact us before finalizing the loan.

Save By Consolidating Loans

          If you are a recent college graduate repaying your variable rate student loans, it is about to become less expensive. The same is true for parents who borrowed to pay college bills. You can lock in low fixed interest rates.
          Loans taken out before July, 2006 generally were variable rate, they reset each year on July 1, linked to the 91 day T-bill rate. Since July, 2006, new federal student loans and parent loans are fixed-rate. No new adjustable rate loans are being issued.
          In July, 2008, rates for these loans took one of the steepest drops on record that reflects the Fed’s recent rate cuts. For July 1, 2007 through June 30, 2008 the variable rate federal Stafford student loans charged interest of 7.22%. Now, that falls to 4.21%. Loan rates on federal parent and grad student PLUS loans now drop to 5.01% from 8.02%. The new rates will run through June, 2009.
          On another note, if you may be eligible to save for college tax deductibly, call us. Investors Business Daily July 7, 2008

          If you have questions about the foregoing or any other financial matters, please call us. If you want to read more, visit the AOHL Newsletter Archives at We are always available to see if we can help your family or friends.

          Remember, We’re Here for You!!