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.