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Tax-Free Smarts

David Robson - Friday, May 31, 2019

Graduation season is here, and grads of all ages are excited to move on! Kindergartners are celebrating mastery of letters, shapes, and not eating crayons. Awkward eighth-graders just want to finish getting through puberty. High-schoolers are looking forward to careers, college, and moving out of their parents' nests. College grads are looking forward to crushing student debt and moving back in to those nests. And some panicky grad students (you know who you are), are searching desperately for one last degree to avoid joining the rest of us in the real world.
Most graduations are pretty pedestrian affairs. The same Pomp and Circumstance, the same gowns, caps, and tassels, and the same trite, inspirational speeches filled with dad jokes and lame puns. But every so often, a graduation makes real headlines. This year, it came on May 18, at Atlanta's Morehouse College, a private, historically-black men's college.
Robert F. Smith founded Vista Equity Partners, a private equity firm investing in software companies. Smith is one of the best in that particularly challenging business — he's built a $5 billion fortune and made himself the richest African-American in the country. (Take that, Oprah!) This year, Morehouse granted Smith an honorary degree and invited him to deliver the commencement address. Smith, who has been a generous supporter of educational causes, pledged $1.5 million to the school. So far pretty typical, right?
But Smith saved his real news for the ceremony itself, without even announcing it to administrators ahead of time. He told the audience of 396 graduates: "We're going to put a little fuel in your bus . . . . This is my class, 2019, and my family is making a grant to eliminate their student loans." While the exact figure is still unknown, recent classes have graduated with roughly $10 million in debt.
The best part, as far as students are concerned, is that Smith's extraordinary gift is tax-free. Recipients never owe tax on gifts. As for Smith, givers can give up to $15,000 per year to as many recipients as they like, or $30,000 for joint gifts with their spouse. And givers can pay any amount for medical or educational purposes so long as they stroke the check directly to the institution providing those services. Givers don't owe actual tax until their total lifetime gifts above those "annual exclusion amounts" top $11.4 million per person.
But Smith shouldn't even face those gift tax consequences. That's because, as he announced at the ceremony, he's making a "grant" to nuke the loans. Doing it through the school should qualify it as a deductible charitable contribution, meaning Uncle Sam will cover up to 37% of that cost.
Smith is no stranger to deductible gifts. He's given $50 million to his own alma mater, Cornell, which named their school of chemical and biomolecular engineering for him. (Who knew you could slice and dice engineering schools like that?) He's supported the Smithsonian's new National Museum of African-American History and Culture. And last year, he bought two houses — where the Rev. Martin Luther King was born, and where he lived with his family — and donated them to the National Park Service.
Smith is obviously smart as well as generous. And one thing he seems to know is you don't build a $5 billion fortune without minimizing interference from the IRS. Would you love to be able to make some sort of grand, generous gesture at the next graduation you attend? Call us for a plan to pay less tax, and let's see how generous we can help you be!


The IRS May Be Loosening Their Definition of College Expenses

David Robson - Tuesday, July 25, 2017


Computers and the Internet have become integral parts of education by providing access to online courses, learning and research. It is virtually impossible to be enrolled in postsecondary education without a computer, which is needed to complete written assignments, type reports, prepare theses and access the Internet.

Recent tax regulations have acknowledged the fact that computers, peripheral equipment, certain types of nonentertainment software, Internet access and related services are essential for postsecondary education. Thus, when those items are used primarily by a beneficiary of a qualified state tuition (Sec 529) plan, the cost of the items can be reimbursed from the plan’s funds, tax-free.

In addition, the regulations for the American Opportunity Tax Credit (AOTC) have been modified (effective in 2016) to clarify that the AOTC’s definition of qualified tuition and related expenses includes books, supplies and any other equipment that is required for enrollment or attendance at an eligible institution. For this purpose, the materials must be needed for “meaningful attendance or enrollment” in a course of study; they can be purchased from the institution or an outside vendor.

Computers are not specifically listed in the new AOTC regulations, but the wording certainly implies that a computer qualifies as long as it is required for meaningful attendance. This change is so new that there is no precedent for how the IRS will apply the regulations to computers, as the regulations do not specifically include them. To be on the safe side, each student seeking the credit should get an instructor to write a letter (on school letterhead) stating, “ A computer is required for meaningful attendance.”

For more information regarding which education expenses qualify for Sec 529 plan reimbursements or for the AOTC, please give this office a call.


What Are Coverdell and 529 Education Savings Plans?

David Robson - Wednesday, November 09, 2016

The tax code provides two primary advantageous ways of saving for your children’s education. We frequently get questions about the differences between the programs and about which program is best-suited for a family’s particular needs.

The Coverdell Education Savings Account and the Qualified Tuition Plan (frequently referred to as a Sec 529 Plan) are similar; neither provides tax-deductible contributions, but both plans’ earnings are tax-free if used for allowable expenses, such as tuition. Therefore, with either plan, the greatest benefit is derived by making contributions to the plan as soon as possible—even the day after a child is born—so as to accumulate years of investment earnings and maximize the benefits. However, that is where the similarities end, and each plan has a different set of rules.

Coverdell Savings Accounts only allow a total annual maximum contribution of $2,000. The contributions can be made by anyone, including the beneficiary, so long as the contributor’s adjusted gross income is not high enough to phase out the allowable contribution. (The phase-out threshold is $190,000 for married contributors filing jointly and $95,000 for others.) Unless the beneficiary of the account is a special needs student, the funds must be withdrawn
prior to age 30. The funds can be used for kindergarten through post-secondary education. Allowable expenses generally include tuition; room, board, an travel expenses required to attend school; books; and other supplies. Tutoring for special needs students is also allowed. Funds can be rolled over from one beneficiary to another in the same family. Although the funds can be used starting in kindergarten, the chances are that not enough of earnings will have been accumulated by that time to provide any significant benefit.

On the other hand, state-run Sec 529 plan benefits are limited to postsecondary education, but they allow significantly larger amounts to be contributed; multiple people can each contribute up to the gift tax limit each year. This limit is $14,000 for 2016, and it is periodically adjusted for inflation. A special rule allows contributors to make up to five years of contribution in advance (for a total of $70,000 in 2016).

Sec. 529 Plans allow taxpayers to put away larger amounts of money, limited only by the contributor’s gift tax concerns and the contribution limits of the intended plan. There are no limits on the number of contributors, and there are no income or age limitations. The maximum amount that can be contributed per beneficiary is based on the projected cost of college education and will vary between the states’ plans. Some states base their maximum on an in-state four-year education, but others use the cost of the most expensive schools in the U.S., including graduate studies. Most have limits in excess of $200,000, with some topping $370,000. Generally, once an account reaches that level, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow. Which plan (or combination of plans) is best for your family depends on a number of issues, including education goals, the number and ages of your children, the finances of your family and of any grandparents or other relativves willing to help, and a number of other issues. For assistance in establishing education savings plans, please give the office a call.