COLLEGE SAVINGS 101

Savingforcollege.com

Live cheaply and get a job!
http://www.savingforcollege.com/articles/live-cheaply-and-get-a-job

Posted: 2008-02-29

by Joseph Hurley

That's the message many parents should be offering their college-going children in 2008 if they want to avoid the newly-expanded kiddie tax.

But for many families, the unfortunate reality is that they will not be able to sidestep the new tax, and will end up paying hundreds if not thousands of added dollars to Uncle Sam. Parents may also want to punch a few walls out of frustration you are not alone.

What the New Rules Say

The new rules add another level of mind-numbing complexity to the tax returns of college students, which most people will agree are already too complicated.

Here's the short explanation: Full-time college students under the age of 24 are now subject to the kiddie tax, which causes their investment income above $1,800 to be taxed at the parents' marginal tax rate. There is an exception for college students at least 19 years old, and for 18-year olds who are not yet in college, who can show that their earned income for the year exceeds one-half of their total support.

Of course, if your child does not report over $1,800 in unearned income in 2008, you won't have to deal with the kiddie tax. But many of you have children with investments already in their names, or in UTMA/UGMA accounts, and those investments may have to be liquidated to pay the college bills. (If you've been saving for college with 529 plans, you're in much better shape since the earnings come out tax-free to pay for college.)

Calculate Your Liability

The formula is deceptively easy. Calculate your child's total support, cut that number in half, and compare the resulting figure to your child's gross wages and self-employment income. If earned income ("get a job") is higher than one-half of total support ("live cheaply"), you're in the clear, at least for this year.

Calculating Total Support?

Wondering how to calculate total support? Prepare yourself to spend a few hours, or perhaps a couple of days, studying IRS Publication 501 and its accompanying 26-line worksheet that is used to determine total support for dependency purposes. As you will see, there's no way to feel confident that you've come up with the proper figure.

It's clear to me that Congress blew it. The new kiddie tax rules are a travesty for many well-meaning families, and they're also a great example of how our tax law just keeps getting more complicated.

Joe Hurley is the founder of Savingforcollege.com LLC, and a certified public accountant.

That's the message many parents should be offering their college-going children in 2008 if they want to avoid the newly-expanded kiddie tax.

But for many families, the unfortunate reality is that they will not be able to sidestep the new tax, and will end up paying hundreds if not thousands of added dollars to Uncle Sam. Parents may also want to punch a few walls out of frustration you are not alone.

What the New Rules Say

The new rules add another level of mind-numbing complexity to the tax returns of college students, which most people will agree are already too complicated.

Here's the short explanation: Full-time college students under the age of 24 are now subject to the kiddie tax, which causes their investment income above $1,800 to be taxed at the parents' marginal tax rate. There is an exception for college students at least 19 years old, and for 18-year olds who are not yet in college, who can show that their earned income for the year exceeds one-half of their total support.

Of course, if your child does not report over $1,800 in unearned income in 2008, you won't have to deal with the kiddie tax. But many of you have children with investments already in their names, or in UTMA/UGMA accounts, and those investments may have to be liquidated to pay the college bills. (If you've been saving for college with 529 plans, you're in much better shape since the earnings come out tax-free to pay for college.)

Calculate Your Liability

The formula is deceptively easy. Calculate your child's total support, cut that number in half, and compare the resulting figure to your child's gross wages and self-employment income. If earned income ("get a job") is higher than one-half of total support ("live cheaply"), you're in the clear, at least for this year.

Calculating Total Support?

Wondering how to calculate total support? Prepare yourself to spend a few hours, or perhaps a couple of days, studying IRS Publication 501 and its accompanying 26-line worksheet that is used to determine total support for dependency purposes. As you will see, there's no way to feel confident that you've come up with the proper figure.

It's clear to me that Congress blew it. The new kiddie tax rules are a travesty for many well-meaning families, and they're also a great example of how our tax law just keeps getting more complicated.

Joe Hurley is the founder of Savingforcollege.com LLC, and a certified public accountant.

 

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