Sending Your Kids To College - Educating Your Children

What are parents to do in this financial climate in so far as educating our dear children? As always, the answer is right before our very eyes. We need only to look, listen, and seek knowledge that is understandable and practical. Welcome to my show and the MWIB series regarding financial studies. Please read and learn and be sure to ask lots of questions.

For those of you who havent heard, the kiddie tax is extended to the age of 18 starting in 2006. This means that if a child has more than $1,600 of unearned income (interest, dividends, etc), he or she will pay tax at the parents top marginal tax rate. Prior to 2006, the age was children under 14. The strategy was to try passing income down to the children to take advantage of the lower tax rates to help with funding education. The kiddie tax prevents this from happening.

To tell you the truth, I never thought much of this strategy anyway. I always keep my eye on the big picture leading my clients proactively through the mish-mosh of financial strategies. I feel the very same about the 529 plan. In the proper set of circumstances, the 529 plan works very nicely. If one happens to be quite wealthy, I think the 529 plan provides additional asset protection and wealth preservation when considering estate-planning issues. Because of one being wealthier, I think it is less troubling to me to duplicate strategies in a given portfolio. If one has a retirement plan along with a 529 plan, the investment strategies will be identical. This is unreasonable in my view, as middle income families can not afford to duplicate investment strategies. Instead, the middle income family is better off saving for education by adding to its portfolio outside of the retirement plan. This should be through a combination of tax exempt and high growth vehicles that will minimize tax consequences. By keeping excellent records and understanding such topics as the wash sale rules and capital gain and loss netting, one can further reduce exposure to income tax in the first place (see my article and instructional CD regarding capital gain and loss issues). I also think the 529 plan works for contributing grandparents.

Enough about my thoughts regarding the 529 plan. Lets talk about some other strategies for educating our children. What if the family owns a business? I love the idea of putting children on the payroll I really, really do. The catch is, the child should perform some service for reasonable compensation. Suppose your child is paid $5,150 in 2006. This just happens to equal the standard deduction. The parents business will gain a deduction and sonny boy will not have to pay income taxes because the standard deduction will reduce taxable income to zero. This money can then be used to build junior a portfolio for college. In addition, if the parents business is unincorporated and so long as the child is a minor, there will be no social security tax to pay. Man, do I ever love this stuff. Even when the kid reaches the age of majority, I like this strategy. In many instances, the adjusted gross income of the parents will be too high to take advantage of the hope and lifetime learning credits. In this event, paying our beloved offspring will provide us a tax deduction at the business entity level and will provide income for the student. Remember that wages paid must be reasonable for services rendered. The student will then file his or her own tax return taking use of the standard deduction and one of the educational credits. Notice that I did not mention exemption allowance. This is because the exemption is allowed only to the parent as they are providing support for the child. The parent will be giving up the exemption in order to give the use of the educational credit to the child. Remember that the parent has already gained a deduction by paying wages to the child through the business.

What if there isnt a business? In this case, my thought is for the parents to build their own portfolio using inside and outside retirement plan theories. Understanding capital gain and loss rules can help reduce tax exposure outside of the retirement plan and can allow for wealth building and having funds available for helping our children. The parents may be able to take the educational credits but can still pass it on to the child if tax planning dictates. The student may work while in school (a concept that has yet to kill any young student) and the educational credit could be of some benefit to he or she if the parents adjusted gross income is too high.

Dont be concerned about the extension of the kiddie tax. And dont be overly enthused by the 529 plan. Follow my lead and provoke deeper thought into how to mange educating your children with the other aspects of portfolio building. Use all of your attributes to their maximum potential. Now really, dont you think this article is well constructed and carefully contrived? I told you my way is better.

Ron Piner, CPA

William R. Piner, Jr, CPA Host of the Most Complete Business Program on Radio Better Business on WBIS am 1190 (http://www.wbis1190.com)

Greetings, My name is Ron Piner and I have been a practicing CPA since 1988. I host the most complete business program on radio, "Better Business", Saturday mornings at 10 on WBIS am 1190 (http://www.wbis1190.com). Come join in the fun and the education.

Baby Gifts - Prelude Of Education For Babies
One of the desires of people around the world is to give everything nice to their kids. So much so that they are willing to shell out any amount to fulfill any desire of their children. This perhaps is also because of the fact that people these days are so immersed in their work that they rarely find time to play or spend some time with their kids....

Keys To Success In College
College education is a big step for anybody to take. Many young people are overwhelmed when they are standing on that threshold. However, there are some tips you can follow that will help you along. If you follow them precisely they can become your keys to success in your higher education !It is wise to start up with the planning early. In f...

Students Are Awards $32,000 in Scholarships
Thirty-two students from Western Michigan University have each been awarded a State Farm teacher scholarship of $1,000, for their involvement as teacher interns for the spring semester.In a ceremony held earlier this month, the recipients of the state farm scholarship and their families were joined by the officials of State Farm and WMU. The dean o...

Little Known Ways to Save Money for College
One of the phrases that parents dread the most is this: college money. As soon as their child is born, parents tend to think about the future and actually make plans for their kids.They instinctively think of a profession that they want their children to have in the future: some want their kids to be the next Bill Gates, a big-company CEO or a ...

College Fees - Are They Worth It?
One of the most common and demanding goals in personal financial planning is to accumulate enough money for putting the kids through college. While I don't doubt the value of education I strongly recommend serious consideration of whether a full-time college degree or diploma for your offspring is necessarily the best use of the time and money invo...

College Financial Planning
College financial planning is a method of managing an individuals cash and assets in such a way that they are able to meet the high costs of higher education. College financial planning helps students to select colleges based on academics rather than finances. This new concept is capable of revolutionizing the way people hold and utilize assets for...

Discover the Benefits of Kids Perfume Sets
Kids always enjoy dressing up and pretending to be someone else, children like to feel like they are grown ups. These are just some of the reasons that kids love to have and use their very own perfume sets. Giving a kid one for a birthday, holiday or just for the fun of it, is sure to win over the heart of any child who may be interested in wearing...