As a parent with college-bound children, you are or will soon be concerned with either setting up a financial plan to fund for future college costs, or, if your children are already college age, with paying for current or imminent college bills. We would like to address both of these concerns by suggesting several approaches that seek to take maximum advantage of tax benefits to minimize your expenses.




Planning for college expenses




In many cases, transferring ownership of assets to children can save taxes. You and your spouse can transfer up to $24,000 for 2006 in cash or assets to each child with no gift tax consequences. For children over 18, the income from the assets is taxed entirely to them at their lower tax rates (as low as 10% in 2006). For children under 18, however, income above $1,700 in 2006 is taxed (under the new “kiddie tax” rules) at the parents’ rates.
A variety of trusts or custodial arrangements can be used to place assets in your children’s names. It is not enough just to transfer the income to them, e.g., dividend checks. The income would still be taxed to you. You must transfer the asset that generates the income into their names.




Tax-exempt bonds. Another way to achieve economic growth while avoiding tax is simply to invest in tax-exempt bonds or bond funds. Interest rates and degree of risk vary on these, so care must be taken in selecting your particular investment. Some tax-exempts are sold at a deep discount from face and don’t carry interest coupons. Many are marketed as college savings bonds. A small investment in these so-called zero coupon bonds can grow into a fairly sizable fund by the time your child reaches college age. “Stripped” municipal bonds (munis) carry similar advantages.




Series EE U.S. savings bonds. Series EE U.S. savings bonds offer two tax-savings opportunities when used to finance your child’s college expenses: First, you do not have to report the interest on the bonds for federal tax purposes until the bonds are actually cashed in; and second, interest on “qualified” Series EE (and Series I) bonds may be exempt from federal tax if the bond proceeds are used for qualified college expenses.




To qualify for the tax exemption for college use, you must purchase the bonds in your own name (not the child’s) or jointly with your spouse. The proceeds must be used for tuition, fees, etc. (not room and board). If only part of the proceeds are used for qualified expenses, then only that part of the interest is exempt. But if your adjusted gross income (AGI) exceeds certain amounts, the exemption is phased out. These figures are adjusted annually for inflation. Thus, for bonds cashed in during 2006, the exemption starts to “disappear” when your (joint) AGI hits $94,700 for joint return filers ($63,100 in for singles) and is gone entirely if your AGI is at $124,700 ($78,100 for singles).




Qualified tuition programs. A qualified tuition program (known as a Section 529 plan) allows you to buy tuition credits for a child or to make contributions to an account set up to meet a child’s future higher education expenses. Qualified tuition programs can be established by state governments or by private education institutions. Contributions to these programs are not deductible, and the contributions are treated as taxable gifts to the child. They are eligible for the annual gift tax exclusion ($12,000 for 2006), and a donor who contributes more than the annual exclusion limit for the year can elect to treat the gifts as if they were spread out over a 5-year period. The earnings on the contributions accumulate tax-free until the college costs are paid from the funds. Distributions from qualified tuition programs are tax-free to the extent the funds are used to pay qualified higher education expenses. Distributions of earnings that are not used for qualified higher education expenses will be subject to income tax plus a 10% penalty tax. In choosing the right Sec 529 plan, careful review is recommended of both the performance and costs associated with the plan provider (whether a state sponsored plan or plan available at any financial institution).




Coverdell education savings accounts. You can establish Coverdell ESAs (formerly called education IRAs) and make contributions of up to $2,000 for each child under age 18. (This age limitation does not apply to a beneficiary with special needs, defined as an individual who because of a physical, mental or emotional condition, including learning disability, requires additional time to complete his or her education.) The right to make these contributions begins to phase out once your AGI is over $190,000 on a joint return ($95,000 for singles). If the income limitation is a problem, the child can make a contribution to his or her own account. Although the contributions are not deductible, funds in the account are not taxed, and distributions are tax-free if spent on qualified education expenses. If the child does not attend college, the money must be withdrawn when the child turns 30, and any earnings will be subject to tax and penalty. Unused funds can be transferred tax-free to a Coverdell ESA of another member of the child’s family who has not reached age 30. (These requirements that the child or member of the child’s family not have reached 30 do not apply to an individual with special needs.)




The above are just some of the tax-favored ways to build up a college fund for your children.




Paying college expenses




You may be able to take a credit for some of your child’s tuition expenses, or write off some of the interest on education loans. There are also tax-advantaged ways of getting your child’s college expenses paid by others.




An above-the-line deduction for college tuition and related expenses expired in 2006.




Tuition tax credits. You can take a Hope tax credit of up to $1,650 for 2006 per student for the first two years of college, a 100% credit for the first $1,100 in 2006 in tuition and a 50% credit for the second $1,100 in 2006. You can take a Lifetime Learning credit of up to $2,000 per family for every additional year of college or graduate school (a 20% credit for up to $10,000 in tuition). (The maximum credit amounts are doubled for students in the Gulf Opportunity Zone for 2006.) Both credits are phased out for couples with incomes between $90,000 and $110,000 for 2006 or singles with income between $45,000 and $55,000 for 2006. The Hope credit amount and the phase-out ranges for both credits are adjusted annually for inflation. Only one credit can be claimed for the same student in any given year. However, a taxpayer is allowed to claim a Hope or a Lifetime Learning credit for a tax year and to exclude from gross income amounts distributed (both the principal and the earnings portions) from a Coverdell education savings account for the same student, as long as the distribution is not used for the same educational expenses for which a credit was claimed.




Scholarships. Scholarships (if your child qualifies for any) are exempt from income tax. For this exemption to apply, certain conditions must be satisfied. The most important are that the scholarship must not be compensation for services, and it must be used for tuition, fees, books, supplies and similar items (and not for room and board). (Although a scholarship is tax-free, it will reduce the amount of expenses that may be taken into account in computing the Hope and Lifetime Learning credits, above, and may therefore reduce or eliminate those credits.) Note also that in an exception to the rule that a scholarship must not be compensation for service, a scholarship received under a health professions scholarship program may be tax-free even if the recipient is required to provide medical services as a condition for the award.




Employer educational assistance programs. If your employer pays your child’s college expenses, the payment is a fringe benefit to you, and is taxable to you as compensation, unless the payment is part of a scholarship program that is “outside of the pattern of employment.” Then the payment will be treated as a scholarship (if the other requirements for scholarships are satisfied).




Tuition reduction plans for employees of educational institutions. Tax-exempt educational institutions sometimes provide tuition reduction plans for the children of their employees -tuition reductions for those children who attend that educational institution, or cash tuition payments for children who attend other educational institutions. If certain requirements are satisfied, these tuition reductions are exempt from income tax.




College expense payments by grandparents and others. If someone other than you pays your child’s college expenses, the person making the payments is generally subject to the gift tax, to the extent the payments and other gifts to the child by that person exceed the regular annual (per donee) gift tax exclusion of $12,000 for 2006. Married donors who consent to split gifts may exclude gifts of up to $24,000 for 2006. If the other person pays your child’s school tuition directly to an educational institution, there is an unlimited exclusion from the gift tax for the payment. The relationship between the person paying the tuition and the person on whose behalf the payments are made is irrelevant, but the payer would typically be a grandparent. The unlimited gift tax exclusion applies only to direct tuition costs. There is no exclusion (beyond the normal annual exclusion) for dormitory fees, board, books, supplies, etc. Prepaid tuition payments may qualify for the unlimited gift tax exclusion under certain circumstances.




Student loans. You can deduct interest on loans used to pay for your child’s education at a post-secondary school, including some vocational and graduate schools. (This is an exception to the general rule that interest on student loans is personal interest and, therefore, not deductible.) The deduction is an above-the-line deduction (meaning that it is available even to taxpayers who do not itemize). The maximum deduction is $2,500. However, the deduction phases out for taxpayers who are married filing jointly with AGI between $105,000 and $135,000 (between $50,000 and $65,000 for single filers). The phase-out amounts are adjusted annually for inflation.




(Some student loans contain a provision that all or part of the loan will be cancelled if the student works for a certain period of time in certain professions for any of a broad class of employers – e.g., as a doctor for a public hospital in a rural area. The student will not have to report any income if the loan is canceled and he performs the required services. This is an exception to the general rule that if a loan or other debt you owe is canceled, you must report the cancellation as income.)




Bank loans. The interest on loans used to pay educational expenses is personal interest which is generally not deductible (unless you qualify for the deduction for education loan interest, described above). However, if the loan is “home equity indebtedness,” and interest on the loan is “qualified residence interest,” the interest is deductible for regular income tax purposes, although not for alternative minimum tax purposes. If interest is deductible as qualified residence interest, it can not be deducted as education loan interest.




Borrowing against retirement plan accounts. Many company retirement plans permit participants to borrow cash. This option may be an attractive alternative to a bank loan, especially if your other debt burden is high. However, the loan must carry an interest rate equal to the prevailing commercial rate for similar loans, and, unless you qualify for the deduction for education loan interest (described above), there is no deduction for the personal interest paid. Moreover, unless strict requirements are satisfied, a loan against a retirement account is treated as a premature distribution (withdrawal) that is subject to regular income tax and an additional penalty tax.




Withdrawals from retirement plan accounts. IRAs and qualified retirement plans represent the largest cash resource of many taxpayers. You can pull money out of your IRA (including a Roth IRA) at any time to pay college costs without incurring the 10% early withdrawal penalty that usually applies to withdrawals from an IRA before age 59 1/2 . However, the distributions are subject to tax under the usual rules for IRA distributions.




Some qualified plans either do not permit withdrawals or restrict them. For example, a 401(k) cash-or-deferred plan may allow distributions if the participant has an immediate and heavy financial need and lacks other resources to meet that need. IRS regs name a college education as such a need. To the extent they represent previously untaxed dollars and earnings, amounts withdrawn from a retirement plan are fully subject to tax and are also hit by a 10% penalty tax if they are made before the participant reaches age 59 �. (Note, however, that you cannot roll over a 401(k) plan “hardship” distribution into an IRA to set up a later penalty-free withdrawal to pay college costs.)




A younger plan participant may avoid triggering the penalty tax by annuitization payouts from an IRA or a SEP. This method does not work for 401(k) type plans. The strategy works because the penalty tax does not apply if annual or more frequent withdrawals are made in substantially equal payments over the life or life expectancy of the taxpayer (or the joint lives or joint life expectancies of the taxpayer and designated beneficiary).




Not all of the above benefits may be used in the same year, and use of some of them reduces the amounts that qualify for other benefits. So it takes planning to determine which should be used in any given situation.




If you would like to discuss one or more of the above planning or payment possibilities, or any other alternatives, in more detail, please call or email George Livanos – Tax Principal Sax, Macy, Fromm & Co., PC at 973-472-6250 or glivanos@smf-cpa.com.

While hiking, dancing, and sometimes running between the 8 stages, 130 bands, visual art exhibitions not to mention the ice cream truck, text messaging became the defacto way of communicating amongst ones friends while also adding a whole new level to the concert experience. The festival integrated text messaging enticing the festival-goer to play games, attempt to win prizes (everything from cowboy hats to backstage tours) and most importantly to become the artists and the art themselves in a large scale game of site specific guerilla theatre. We looked for chickens, chased clowns and pondered riddles with thousands of others in Grant Park because for all three days www.blueroom.att.com sent out messages to those who had signed up for the Mindfield Experience on lollapalooza.com in anticipation of getting to and being in the show. Throughout the weekend messages appeared on my cell like “Find the Giant Chicken 4pm near ATT Oasis and unscramble his egg riddle. It is no yolk win vip passes” or better yet “Look for Guadalajara Joe and blimp balloons 7pm causapalooza for a spoon jam flashmob fiesta…” The Mindfield stage and its interactive element proved the perfect distraction for those ready to give their ears a rest but who were still up for diving into the unknown within the urban oasis.

-Jennifer Glickman-

When the National Retail Federation reported that consumers spent $13.39 billion last year on back to school related items, the number seemed remote – it affected other people, not me. But when I heard that the average family spent $434 last year it hit home. With inflation edging up and the cost of gas jerking skyward two additional components will drive up prices this year as well. We’ve identified key expenditures and ways to keep costs in check.

Textbooks. The first thing you can do is know what materials you need. Check with your school or teacher and if it’s a textbook you’re looking for, go to Amazon.com. According to The College Board, last year, the cost of books and supplies ranged from $801 to $904 depending upon the type of institution a student attended. Amazon.com is offering a savings of 20% over bookstore prices, an additional $15 off on orders over $150 and you may get free shipping – check the shipping policies. Savings for used books can be up to 90% by shopping Amazon’s partners. You’ll also save on gas.

You can also save on air travel. With capacity at 90+% on planes, tickets costs are soaring. One way to keep in touch with family and friends and save money on air travel is with a digital video camera. Shooting video of yourself and burning it to DVD is a great way to let everyone back home know what you’re up to. Toshiba’s GSC-R30 makes it simple – you can edit and watch your video on the camera itself. Burn it to a DVD for your family by connecting it to your PC or DVD recorder. By the way, it also takes still photos.

Shop smarter – look for sales and buy throughout the year. One Austin, Texas-based company, Mobile Campus, is working with several universities to keep students immediately updated about the latest retail specials as well as campus events and important university announcements. Students opt-in for the service at no charge and receive text messages directly to their phones or texting devices. Students will get no more than 2 ads each day unless they opt for more and they can receive notification of class changes, university closures, Greek meetings, and other university-related announcements.

Need a good tutor? Why pay $40-$60 an hour to meet with a tutor when for only $25 an hour you can have your own personal online tutor? Growing Stars is a California-based company that will match your student (grades 3-12) with an online tutor for science and math (other subjects and grade levels are available ? check with the company). The student speaks with the tutor using a supplied headset that plugs into your computer (also requires a high-speed Internet connection) while provided software allows student and tutor to write to the same “whiteboard” simultaneously. It’s like two people writing to the same blackboard but from two different cities. There’s an initial fee of $150.

A great deal this year is computers. Intel has just launched its Core 2 Duo chip and its release is driving down the cost of the original Core Duo chips. You can actually get a terrific laptop for $800. This one from HP is about $1100.

The Duo means there are two chips in the computer and like having two heads, two chips are better than one. If you plan to do a lot of photos, video, music, TV and you want to surf the web and IM friends at the same time invest in the newer Core 2 Duo. All of the big computer manufacturers including HP, Dell, Toshiba, and Gateway will have the new chips in their products by the end of August. Apple has not formally announced its intentions for the new chip.

Last, but certainly not the least (expenditure), the cost of tuition itself. Your best plan of action is to plan ahead. George Livanos, Tax Principal Sax, Macy, Fromm & Co., PC describes various ways to pay for college and reminds us that limiting tax liability is a key part of any strategy. Using a home equity loan where the interest is deductible is one way. As in most tax-related issues make sure you have the advice of a financial professional. Mr. Livanos’ column is a good place to start.




-Rob Floyd-

There was a time when the phrase “Back To School” would put butterflies in my stomach. The anticipation of another school year was always a source of anxiety and excitement. I was never too crazy about shopping for “back to school” clothes, but I couldn’t wait to get to my neighborhood stationary store and buy my “must have or die” school supplies. Of course in my day, school gear meant a loose-leaf binder, book covers, a pencil case, lunch box, and maybe some cool markers. These days the average wish list of school tools includes enough technology and electronics to make an astronaut jealous.



Phone Home

The Firefly phone is the first cell phone designed for kids. Sure, it’s small and has kid-friendly buttons, but it’s the parent-friendly feature of controlling all incoming and outgoing calls that makes firefly popular with grown-ups. Instead of a typical phone keypad, parents use a PIN-activated menu to program up to 22-outgoing numbers into the Firefly phone. Kids can quickly and easily make calls by pressing one of three speed dial keys – Mom, Dad or Phone Book. Parents control the cell phone use and kids don’t have to remember a bunch of phone numbers. The Firefly costs about $100 and is available at Target, Toys R Us, Limited Too Stores and through http://www.fireflymobile.com.



“Lo-Jack” For Your Kids?

This could be every teen’s nightmare. With Sprint Family Locator, mom knows where you are 24/7. It’s a new phone service that uses GPS to enable a parent to use a phone or PC to track the child’s phone. You actually see the phone’s location on a map along with the address and surrounding landmarks. Once the phone is located, a parent can connect with the child using a text message or a voice call. Sprint Family Locator costs about $10 a month and it allows a parent to locate up to four phones. For more information go to http://www.sprint.com/familylocator.



Marking Time

The Mark-My-Time digital bookmark is a bookmark that does more than just mark a book. It has a built-in timer and alarm to count down reading sessions or to calculate accumulated reading time. I guess the thinking behind this product is that by adding a stopwatch to a book, it might make reading less of a boring chore and more like a fun Olympic event. If it gets kids reading, I’ll all for it. The Mark-My-Time digital bookmark costs under $10 and you can find it at Costco, Sam’s Club, Barnes & Noble, Borders and Walden’s Books as well as independent booksellers nationwide.



This Chair Rocks

Say good-bye to beanbag chairs. The X Rocker II is padded rocking chair with a built-in sound system. It connects to a variety of media devices including iPod, Xbox, PlayStation, DVD players and most home theater systems. It has headrest speakers with a built-in subwoofer so it surrounds the occupant with sound. There’s even storage for cable accessories and controllers inside the chair. Seems like the perfect spot to do homework. The X Rocker II will be sold at Target and Wal-Mart for around $100.



“Really, I need an iPod for School”

If you child doesn’t already have an iPod, this next gadget could give them a clever strategy for winning you over during the next “I need an iPod” discussion. It’s Belkin’s TuneTalk Stereo. It plugs into the iPod and converts the iPod into a voice recorder. With two high-quality omnidirectional microphones, you can record memos, lectures, interviews, or conversations in full stereo. It’s perfect for recording a teacher during a class. And, of course, your kids will find other uses for the iPod when they are not in school. The Voice Recorder attachment costs about $70 and is available at http://www.Belkin.com as well as from the Apple store and other major retailers.



Al Gore Approved Backpack

Here’s a backpack that really knows how to multi-task. It has lightweight, waterproof solar panels sewn into the top of the backpack generating about 4 watts of power. This way a child can charge his/her iPod, MP3, cell phone or PDA while walking to school. A Li Ion battery pack is included with each pack to store any surplus power generated. The battery pack can also be charged with an AC travel charger or car charger. This way the backpack is handy rain or shine. After all, what could be worse than having an iPod, MP3, cell phone or PDA and not have it charged when you get to school. It’s available at http://www.voltaicsystems.com and costs about $240.



Photos To Go

Just because you’re at school doesn’t mean you should be separated from your digital images. Royal just launched the first digital picture album that can clip almost anywhere. The PF 140 can clip to a belt, backpack, or locker. Flip the clip around and you can place it on top of your desk, shelf, or nightstand. It holds up to 59-digital pictures. The 1.4-inch color display can show still photos or a slide show. The clip costs about $70 and is available at Sam’s Club, Target, Frontgate catalog, and at http://www.royal.com.



Troubling Times

It’s truly a sad reflection on our times that watch like this even exists. Parents should be looking for watches with cartoon characters on the watch face, instead there’s the AmberWatch. It’s a watch with a built-in siren designed to scare off predators. When activated it emits 115-decibels. The makers of this timely timepiece say that the alert signal can be heard from over a football field away. It costs about $40 from http://www.AmberWatch.com.



Smart Lock

Remembering a random string of numbers can be tough. If you’re a kid and you forget your combination lock code, you’re finished. Your locker stays locked; your bike stays in the rack. With the Wordlock, you no longer need to memorize a random string of numbers. Instead you just have to memorize a word. A much easier solution for most kids?unless they have trouble spelling. Wordlock costs about $6 and is available at http://www.wordlock.com or at Staples.
-Steve Greenberg-

Yes, Lollapalooza the 3-day hyper-tech music festival in Chicago which took place just a few weeks ago.

With school about to start, keeping kids safe is on parents and educators’ minds but I didn�t expect to be reminded of this issue while on my recent excursion to Lollapalooza.

All three days of the festival had special just for kidz programming and while naturally all parents are concerned for the safety of their children at large public events I was impressed by how Kidzapalooza addressed the safety issue head on. Utilizing new technology to help kids who may have accidentally become separated from their parents, the Tag-a-Kid booth registered kids and parents, giving kids a specially coded wristband and noting their parent’s contact information on corresponding files. If a child accidentally became separated the festival volunteers were trained to take the child back to the tag-a-kid booth where the parent’s contact information was retrieved and a quick cell phone call would reunite the family and get them back in the mix. Hopefully tag-a-kid or similar programs will become more widely available at other large gatherings (ballparks, museums, malls) reassuring parents nationwide that a few simple steps can lead to great (safe) day in the big world.

In “Back to School Tools” below, Steve Greenberg has a couple of good safety tips specifically for parents of younger children going to school.

-Jenn Glickman-