I hoped you enjoyed last month's Financial Strategies and especially the article about Social Security claiming strategies.  Now...you can burn that edition.  In the dark of the night (literally and figuratively) your US Congress passed legislation eliminating advanced Social Security claiming strategies for the vast majority of the readers of this newsletter.  The President has signed the bill into law.  I find it interesting as this law supposedly closes loop-holes used by the "rich", but the strategies help married couples where both spouses have earned Social Security benefits the most...your typical "rich" person.

Oh well...on to this month.  I thought I would start out covering Student Financial Aid and how your assets and income affect it.  The FAFSA will rear its head soon.  The second article is a refresher on IRAs.  It never hurts to "brush-up"  Make sure you read and understand the rules for roll-overs....that is a recent interpretation of the law and the IRS is not likely to give you a 'Mulligan".

Have you heard about some great, creative way to invest your IRA?  Before you pull the trigger read my Quick Comment.

I wrap up this newsletter with an article on "tax moves" you can make before the end of the year and one on an advanced estate planning technique using Charitable Lead Trusts.

 

Before you know it, Christmas will be over and it will be that time.  Time to file the FAFSA.  The FAFSA, many people believe, determines how much financial aid your child will receive to help defray the cost of college.  But, much like your tax return, once you start filling out the FAFSA, the result is determined.  You're just documenting the math. 

Understanding how your, your child's, and other's income and assets affect the Financial Aid equation can allow you to "manage" how much Financial Aid will actually be awarded.  So, let's take a look...

Parents

Assets.  Parents are expected to contribute 5.64% of assets towards "Junior's" college expenses. The family's Primary Residence and Retirement Savings are not counted as assets.  529 plans are.  A certain percentage of your assets are protected and not counted when calculating the contribution (5.64%).  The amount depends on the number and age of the parents.

Income.  Between 22% and 47%  (after a $30,000 to $42,000 exemption) of eligible parental income is expected to be used for college expenses (yup, you read that right).  Unfortunately for many readers of this newsletter, Veterans Benefits must be included in income even though you don't report the income on your taxes.  The same would hold true for deductible contributions to your retirement accounts.  Withdrawals from 529 plans do not count as income.

So...Things to consider might be paying down a mortgage as transferring your cash to the house would reduce your countable assets.  This might not be a good idea for other reasons, however.  Maximizing your contributions to retirement accounts might accomplish the same thing.

Assets.  Students are expected to contribute 20% of assets towards college expenses.  There is not an exemption.  Fortunately, 529 plans are counted as parental assets even if the student is the owner of the 529 plan.

Income.  After a $6,260 exemption 50% of the student's income is expected to be used for college expenses.  Like the parent, in most cases (see below) distributions from 529 plans do not count as income.  Scholarships and Loans do not count as income.

So...You could consider transferring assets in a student's name to a 529 plan to reduce the amount that are expected to be used to pay for college expenses.  As you already knew, scholarships are a good thing.

Assets.  Assets held by Grandma and Grandpa, such as a 529 plan that names the student as the beneficiary, do not count as assets on the FAFSA.

Income.  Grandma and Grandpa's income are not reported on the FAFSA.  But, distributions from a 529 plan owned by Grandma and Grandpa are reported as income by the Student.on the FAFSA

So...If at all possible, don't take distributions from Grandma and Grandpa's 529 until after the last FAFSA has been filed.

Timing.  Students that start college in the fall of 2016 will use income data from 2015 to complete the FAFSA.  In a change that I generally agree with, students who start college in the fall of 2017 will also use 2015 income to complete the FAFSA.  Going forward, students will use the income data from the year that ends while they are a Junior (for the first year of college).  This is called the "year prior-prior".  This should make it a little easier to do the FAFSA...you won't have to estimate your taxes and update the FAFSA later to meet college deadlines.  You'll also get one more year to use funds from Grandma and Grandpa's 529 plan to pay for college expenses without affecting the Family's expected contribution.

There are a lot of other issues when planning for college funding.  GI Bill, Tax Credits and Deductions are just two of them.  If you'd like some help with this complex subject...give us a call.

If you are opening an IRA for the first time or need a refresher course on the specifics of IRA ownership, here are some facts for your consideration.

• If you are single and covered by an employer-sponsored retirement plan, your traditional IRA contribution for 2015 will be fully deductible if your AGI was $61,000 or less. The amount you can deduct begins to decline if your AGI was between $61,000 and $71,000. Your IRA contribution is not deductible if your income is equal to or more than $71,000.
• If you are married, filing jointly, and you both are covered by an employer-sponsored retirement plan, your 2015 IRA contribution will be fully deductible if your combined AGI is $98,000 or less. The amount you can deduct begins to phase out if your combined AGI is between $98,000 and $118,000. Neither of you can claim an IRA deduction if your combined income is equal to or more than $118,000.
•  If you are married, filing jointly, and your spouse is covered by an employer-sponsored plan (but you are not), you may qualify for a full IRA deduction if your combined AGI is $183,000 or less. The amount you can deduct begins to phase out for combined incomes of between $183,000 and $193,000. Your deduction is eliminated if your AGI on a joint return is $193,000 or more.
• If you are married, filing jointly, and your spouse is covered by an employer-sponsored plan (but you are not), you may qualify for a full IRA deduction if your combined AGI is $183,000 or less. The amount you can deduct begins to phase out for combined incomes of between $183,000 and $193,000. Your deduction is eliminated if your AGI on a joint return is $193,000 or more.
•  If neither you nor your spouse is covered by an employer-sponsored retirement plan, your contribution is generally fully deductible up to the annual contribution limit or 100% of your compensation, whichever is less.