Broker Check

May 29, 1998

Tax Planning for Children

          Children now provide more opportunities for tax planning as a result of the `97 tax law. This includes income, gift and retirement planning. Grandchildren, too!!

          Capital gains, new types of  IRAs and college tax credits are the new topics for tax planning where having children can be helpful.

          Children, 14 years or older, usually will  pay a far lower capital  gains  tax, 10% v. 20% for their parents, on assets held for 18 months. Children under 14 will pay the same tax rate as their parents pay.   Combined with giving up to $10,000 a year  free of the gift  tax, this lets parents shift assets at a lower tax cost just in time for college. Of course, these funds belong to the child at age 18 and this could be a concern to some  if the child does not use the money for college.

Education IRAs

          Children can also use the two new types of IRAs,  Educational IRAs and Roth IRAs including the conversion kind from existing IRAs.  Education IRAs are exclusively for children under 18. Up to $500 can be set aside each year per child. Income will  escape  tax when used for college before  30 if used for that child or another family member. Only restriction-if  the  income of the person setting up the IRA is more than $95,000 if single and more than $150,000 if  married filing joint, the total amount to be set aside is reduced.  Roth IRAs  can  be funded for a child with income from summer jobs or after school work-up to $2,000  per year  if the child  makes that much.  Payments of earnings on a  Roth are  generally  taxable if before  59 1/2 and  within four  years  after  the  first payin was made to the Roth. Annual  payins of $2,000  for ten  years  can  be used tax and  penalty free for the down payment on the first time purchase of a home.

Roth IRAs

          Converting a child`s current  IRA to a Roth is also worth doing.  The amount converted is  added to child`s income-25% per year for 1998 through 2001.  That tax will be far less than if Traditional IRA pays out in later years. Payout will be tax free after 59 1/2. Penalties apply to all funds taken from  converted  Roths within five years. Works best for children age 14 or over. If younger, taxed at child`s rate.

Tax Credits

          Don`t  forget the  new Hope  credits and Lifetime Learning credits.   While parents may  not  be  able to use them because of income limitations, it may make sense for the child to claim the credits on their tax returns.  Ask us if they apply in your case.

NYS College Choice Tuition Savings Program

          As part  of the 1997-1998  budget  New York State enacted  the College Choice Tuition Savings Program. Beginning in tax years starting on or after January 1, 1998 both New York resident and non-resident taxpayers may establish savings accounts to pay for qualified higher education  expenses  of  attending recognized public or private institutions of higher education anywhere.  The state comptroller is charged  with  implementing  the program and in selecting the financial organizations to invest the funds. Individual taxpayers may contribute up to a maximum of $5,000 per year, with taxpayers filing joint returns, up to $10,000. If the taxpayer does not mind leaving the investment decisions up to the state comptroller this seems to be a reasonable tax shelter. Regulations and guidance  are  not  expected from Albany until this summer. Howard Lisch, through CFS Brokerage, Corp. can set up IRAs, Roth IRAs and roll them over.

Financing A College Education

          We have all heard of applying for scholarship and federal Safford and PLUS loans, not to mention Home equity loans.

          Consider  the advantages of borrowing  against securities you own, stocks, bonds or mutual funds. It  is an alternative  to selling those securities and triggering capital gains on which  tax is owed.   Simply put  these securities in a  brokerage account, pledge  them  as collateral,  take out a margin loan for 50% of the current value of the securities. The advantages are that  you  are not  depleting your cash resources, not using high cost credit, the interest expense is generally tax deductible and you still are able to gain  the future capital appreciation from this stock market. The  best of all worlds would  be  if  you used this idea,  the value of your portfolio rose about 21% per year,  you could them sell your appreciation in the portfolio to cover the entire cost of college plus interest,  and still have your principal remaining. If interested further in this idea, talk to Howard  Lisch and  your stockbroker for details.

Thank You!

          It was  a tax  season to remember!   With  three  administrative  individuals leaving us during tax season and because we added additional professional help we were able to handle all the regular and new business that came in.  A special helper was the future senior partner,  Melissa Lisch,  who during her spring break handled the front desk in New York for the last week of tax season.

          We  thank  everyone  for their  patience if  we were not able to pick up the telephone as fast as before or if your tax returns did  not go out as fast.  We expect next year to be smoother  as  a  result  of our anticipated move to midtown and our expansion. More details in a later newsletter. But, we will be in a larger, newer, and more convenient location  with much more staff   and  providing  more financial services by the fall.

          If you have any questions about these or any other financial matters, please call me.