In This Issue
Unintended Consequences
Didn't Save Enough for College?
Curt's Quick Comment
Charitable Giving Opportunities for Investors
From the Financial Presses
Quick Links
Unintended Consequences
One of the things that hasn't been talked about much in the discussion of how ObamaCare will affect you is the medicare surtax on trust income.  If you have used irrevocable or testamentary trusts in your estate plan (such as for special needs children), make sure you check out my blog post on Unintended Consequences (click here
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Financial Strategies
Planning Techniques, Procedures and Guidance for Military Professionals

Welcome to the August edition of Financial Strategies.  This issue focuses on something many of us are dealing with right now.  Paying for college.

The first article talks about how you can reduce some of the "sticker shock" of college expenses through effective use of the tax code.  We can't make college free, but your rich uncle (Sam that is) might be able to help a little bit.

My quick comment talks about an important topic that many parents forget.  When "Junior" turns 18 you no longer have any parental rights.  So...if anything happens while your child is away at college and you don't have the appropriate estate planning documents in place you could find yourself in a very stressful situation.

I thought some of you might want to figure out how you can get your name on a building at State U so I included an article on charitable giving.  In all seriousness, there are a lot of things that can be done through effective giving plans to reduce your taxes, both estate and income, and do some good for a deserving charity.

I wrap up this edition with two articles from the financial presses.  The first article has a pretty good summary of what ObamaCare will do to your taxes (see the article to the left for a specific problem with the law).  Regardless of what you may have heard the law will affect taxpayers at virtually all income levels.  The last article is another quiz.  Take it to see how much you know about investments.

Where does the summer go?  Enjoy this last month of summer...are you ready for some football?  Go Packers!

Curtis L. Sheldon, EA
C.L. Sheldon & Company, LLC
(703) 542-400 or (800) 928-1820
Didn't Save Enough for College Costs?
There are Ways to Soften the Blow


Fall must be just around the corner.  I just received my first friendly note for the Virginia Tech Bursar.  The note is friendly because the Bursar wants me to pay tuition and expenses for my Sophomore son.  It seems the Bursar only writes when he wants money.  I can't say that he is one of the people I look forward to receiving emails from.  So like many of you, I'm faced with college expenses...again.


Hopefully, you've saved and planned for college expenses or have sufficient disposable income to pay for the expenses.  But if faced with more college expenses than you'd like (whether you saved or not) there are ways you can soften the blow.


Take Advantage of Tax Breaks. 


Even if you have the money saved in a tax advantaged account like a 529 plan or a Coverdell Educational IRA you may want to pay some of your expenses with post tax dollars to take advantage of the tax breaks that may be available.  Many of these tax breaks are limited by Adjusted Gross Income (AGI) so you will want to carefully manage your income if you can.  Increasing your 401(k) contributions or selecting which year to take income from investments could keep your AGI below phase out limits.


The American Opportunity Credit.  The American Opportunity Credit is a dollar for dollar reduction in your taxes of up to $2,500.  The credit is based on 100% of the first $2,000 paid in tuition and qualified fees and 25% of the next $2,000 in tuition and fees.  The credit phases out between $160,000 and $180,000/$80,000 and $90,000 of AGI (Married/Single).  If your AGI is below the $160,000/$80,000 AGI limit you will definitely want to take advantage of this credit.  Even if you have a tax advantaged account, pay $2,000 of tuition and fees with after tax dollars (not from a 529 or Educational IRA).  You'll in effect get a $2,000 reduction in tuition.  You would also want to determine if it makes sense to pay the second $2,000 of tuition with post-tax dollars to receive the additional $500 credit -- This would depend on how much money you have in tax advantaged funds (remember under current law, this is the last year that the American Opportunity Credit will be available) and your tax bracket.


The Lifetime Learning Credit.  The Lifetime Learning Credit allows you to take a credit for 20% of the first $10,000 of qualified education expenses per year.  To qualify for the full credit, your AGI must be less than $122,000/$61,000 (Married/Single).  Unlike the American Opportunity Credit, the Lifetime Learning Credit may be used for education other than the first four years of post-secondary education (Post-Graduate, Job Skills Improvement). 


Student Loan Interest Deduction. You can deduct Student Loan Interest of up to $2,500 if your AGI is below $120,000/$60,000 (Married/Single).  The deduction phases out by $150,000/$75,000 (Married/Single).  There are two significant things with regard to this deduction.  First, the deduction is "above the line", which means you do not need to itemize to get this deduction.  And since this deduction is used to calculate AGI, it could potentially also increase your itemized deductions that are limited by AGI (Medical Expenses and Miscellaneous Deductions are two taxes that are limited by AGI).  Second, room and Board are considered qualified expenses for the Student Loan Interest Deduction and are not qualified expenses for the credits above.


Income Shifting.


Another thing you can do to reduce the sting of college expenses is to shift income to lower tax bracket individuals who then use the income to fund their education.


Gift Appreciated Assets.  Sometimes parents have appreciated assets that they plan to cash-in to pay for college expenses.  Instead of cashing the assets in, it may make more sense to gift the assets to the college student and let the student cash the assets in.  This scenario makes sense (for 2012 depending on what happens with the Bush Tax Cuts) if the parent is in the 25% or higher tax bracket and the student is in the 10% or 15% tax bracket.  In this scenario, the gains would be taxed at 15% for the parent and 0% if the college student cashes the assets in.  There are limits.  If the amount of gain exceeds $1,900, then the amount that exceeds the limit is taxed at the parent's rate.  This is the so-called the Kiddie Tax (The calculations are different if the child has earned income).  But if you can gift assets with $1,900 worth of long-term capital gains to your child, you're looking at a Federal Tax savings of $285.  Remember, though the total amount you can gift in a year without being subject to gift tax is limited.  Also, a gift is a gift...if Junior runs off to join the circus after you gift the asset, you can't do anything to get the asset or money back.


Use your business to shift income.  If you are self-employed or have a business, you can hire your college student to work for you and earn money for college.  Besides getting help with your business, the wages you pay to your child are deductible to you/your business and taxable income to your child.  Most likely your child is in a lower tax bracket than you are.  There are two things to watch for here.  First, the pay has to be reasonable (not too high and not too low).  Second, make sure that the Income Tax decrease is greater than the amount you will have to pay in payroll and other employment taxes.  This is probably only the case if the parent is in the 25% or higher bracket.


Look at State Tax Deductions


There may be opportunities to reduce your state tax bill as well.


Route your money through a 529 plan.  Once you have retired from the military and are no longer a Texas or Florida resident you have the joy of experiencing State Income Taxes.  You may be able to reduce your State Income Tax by contributing to a State Sponsored 529 plan.  Many states offer tax deductions or even credits for money contributed to 529 plans.  Some allow you to carry deductions forward if you contribute more than the amount you can deduct.  So, you might be able to contribute funds to a State Sponsored 529 and reduce your state income taxes for this year and for years to come.  The rules vary from state to state, so confirm that your state doesn't have a minimum time that the funds have to be invested in the 529 Plan or limitations if the child is currently a college student for the deductions/credits to apply.


GI Bill


Plan Your GI Bill Use.  If you qualify and have transferred your Post 9/11 GI Bill Benefits to your children you can of course use this to pay for college.  But before you split your benefits equally between your children take a look at the effects of scholarships and differing tuition levels.  For more information on this topic, see my blog post by clicking here.


Now, none of the techniques above are a Miracle Cure for College Expenses but they can help you keep a little bit more of your own money.  Take some time to sit down with your planner/tax advisor to see which options for paying for college result in the most money in your pocket when Junior gets the old sheep's skin.



Curt's Quick Comment


What would you do if your child ended up in the hospital while off at college and was unable to communicate with you or the medical staff?  Once your child turns 18 you may be able to do less than you think you would.  Under the law, hospitals are not required to give you medical information and you may not be able to make medical decisions on your child's behalf.  The same goes for financial and legal decisions.  Avoid the additional stress and draw up the appropriate estate documents for your college student.  A Healthcare Power of Attorney/Advance Medical Directive and a Durable General Power of Attorney are probably the minimum.  See your attorney for more information...

Charitable Giving Opportunities for Investors

 Twenty Dollar Bills

When choosing the most advantageous charitable giving strategy, individuals must evaluate a number of factors, such as their need for current income, their desire to control and preserve assets during life and after death, their specific charitable intent, as well as important tax management issues. Charitable estate planning techniques can help achieve many of these objectives. Donor-advised funds, family foundations, and charitable remainder trusts (CRTs)/charitable lead trusts (CLTs) are available to individuals and their families. 


Donor-Advised Funds 


A donor-advised fund is a tax-advantaged charitable giving vehicle that offers maximum flexibility to take tax deductions and recommend grants to charitable organizations.  By definition, donor-advised funds are public charities under Section 501(c)(3) of the Internal Revenue Code, and contributions to such funds are tax deductible.

Donor-advised funds are particularly family-friendly, as parents and children can consolidate their giving activities through a single fund account.  In addition, children can be named as successors to a fund, ensuring the continuation of a family's giving legacy.

Another significant advantage of a donor-advised fund is its capacity to accept any one of a variety of assets as a charitable contribution.  Checks/wire transfers, commercial paper, mutual fund shares, securities, bonds, and restricted stocks all are acceptable assets(1).  In additional, the account has the potential to grow over time, increasing the donor's giving power.

Family Foundations: Building a Legacy, Reaping Tax Benefits


A family foundation derives its assets from the members of a single family, in which the donor and the donor's relatives play a significant role in managing the foundation.  Aside from helping channel their philanthropic ambitions, family foundations can form a legacy of community involvement and responsible citizenship for generations to come.  As their founders soon realize, family foundations offer potential tax and estate planning benefits.


Private Foundations Versus Supporting Organizations


There are two types of family foundations: private foundations and supporting organizations.  Private foundations, the more common of the two, offer more flexibility and control (i.e. they can select and oversee their own board of directors and grantmaking decisions), while supporting organizations enjoy more favorable tax treatment.


Gifts made to either type of family foundation are generally tax deductible from the donor's annual income tax, yet these deductions differ depending on the foundation's structure, the type of property or asset contributed, and the donor's income level.  As a general rule, all gifts to a family foundation are removed from the donor's estate, avoiding estate or gift taxes.


Balance Giving Goals and Financial Planning


While the tax benefits associated with charitable giving help reduce the cost of making charitable gifts, an individual's income or wealth transfer needs determine the ability to give.  To address both goals, vehicles such as CRTs or CLTs are available.


A CRT can guarantee a lifetime income stream for a donor and a spouse, while minimizing current income taxes.  Donors generally may deduct the fair market value of a charity's remainder interest in the CRT during the year the CRT is funded.  A CRT also can be an integral part of a family business succession plan.  A donor can transfer stock to a CRT, and a closely held corporation may redeem the shares.  The redemption funds the CRT with tax-free monies that subsequently can be invested to provide an income stream to the business owner an the spouse.


A CLT provides control over and enjoyment of a donor's assets during the donor's lifetime, and estate tax deduction at death equal to the present value of the charity's future income interest, and a legacy to family heirs with potentially little or no estate tax consequences.


Including charitable giving strategies within your estate plan can be an effective way for you and your family to enjoy an income stream during your lives, earn tax savings, and maintain a significant degree of control over assets.  Be sure to consult an attorney or a financial advisor who can help you identify the strategies that are most appropriate for your situation.




(1) Investing in mutual funds involves risk, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Investing in stocks involves risks, including loss of principal.

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
2012 S&P Capital IQ Financial Communications. All rights reserved.

From the Financial Presses


Impact of Top Court's Ruling on Health Care Law 


On June 28, 2012, the U.S. Supreme Court handed down its long-awaited decision on the controversial health care law implemented by President Obama, the Patient Protection and Affordable Care Act of 2010 (PPACA) - widely known as "Obamacare." With the exception of an expanded Medicaid requirement on states, the nation's top court upheld the constitutionality of the law. So where do we go from here?  (To read more click here)


Do You Understand Investments?


People who find themselves owning complex investment vehicles often leave the driving to the professionals. And that's perfectly acceptable, but even "passengers" should have a basic understanding of how a particular investment works-especially when it's your hard-earned money on the line....(Click here to take a quiz) 
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC 's current written disclosure statement discussing our advisory services and fees is available for review upon request.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).
Military Professionals have unique financial benefits and unique financial needs.  If you think you would like some help developing your Financial Strategy please give us a call at (703) 542-4000 for a free initial consultation or for more information go to our website at .