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Strategies for Saving Money

Start With The Basics

• Establish your goals – an amount (say 10% of your income increasing 1% every two years until you reach 20%) and reasons for saving (perhaps a house, vacation or automobile)
  
• Organize your finances – keep track of what you spend and why (this is known as a spending plan a.k.a. budget)
  
• Each week try to reduce your spending and place that amount into savings
  
• Balance your checkbook often and don't forget to keep track of debit and ATM transactions
  
• Avoid using ATM machines that require a service charge
  
• Measure what you earn (from employment, financial aid, other sources) against what you spend – keep track of the cents as well as the dollars. People who know where their money goes spend far less and save more. Keep a little notebook with you to record your small cash purchases.
  
• Keep it basic -- pay off credit card and other debt and don't take out more in student loans than is absolutely necessary. Start paying off your credit cards beginning with the one with the highest rate. Cut up all of them except the two with the lowest rates. Begin paying extra every month on the card with the highest rate. When it's paid off, move to the card with the next-highest rate. When you're finished, start adding what you were paying in credit card payments to your savings account. By paying down debt, you get a return of whatever the interest rate happens to be. So pay off $1,000 that you're carrying at 21% and you get a 21% return. 
  
• Keep living expenses to a minimum – shop with coupons, live with a roommate, purchase store brands (Note: every dollar you don't spend on a house saves roughly $2.40 in mortgage payments
  
• Don't wait to start saving because time is money -- $50 per month at 5% for 10 years will amount to $7,764, the same amount over 20 years equals $20,552 a $12,788 difference by waiting 10 years
  
• Establish a saving habit and save consistently – set up an automatic investment plan, arrange to have $50 a month deducted from your bank account and deposited into a mutual fund account with below-average risk, low minimum purchase requirements and a good, steady record of solid returns. 
  
• Maximize use of your company's 401(k) plan at work – employers often match employees contribution up to a certain limit (a 50cents on a dollar match give you an immediate 50% return on your money). If you have maxed out with your company's retirement plan consider the Roth IRA, which means you contribute after-tax dollars, but that can be withdraw in retirement tax-free. 
  
• Keep a long-term viewpoint – spending some of your retirement plan money before you retire can be very tempting but it is important to remember that you can't retire on money you have already spent
  
• Get financially savvy – money ambivalence is the greatest detriment to financial security
  
• Protect your most important asset – your ability to work 
  
• Consider paying a extra each month on your mortgage – you can round up your payment to the nearest hundred, you can add an additional $50 or more to the principal payment or you can pay on a bi-weekly basis, thus dividing your monthly payment in half every other week. Any of these approaches will add equity to your home, giving you extra flexibility when you decide to move, refinance or take out an equity line of credit to help pay for college. If you prepay $100 a month on a $150,000 loan, you will save $72,952 in interest and shave 7 1/2 years off the loan.
  Seek better safe returns – move extra money from your checking account to a passbook savings account, move passbook saving account money into certificates of deposit
  
• Pay off your car loan – deposit the equivalent of your car loan payment into savings
  
• Properly maintain and service your car – automobiles are now build to last for between 100,000 and 150,000 miles when properly serviced and maintained. Your auto can give you years of transportation without the burden of a car payment.
  
• Review term life insurance policies -- if you've had the same term life insurance policy for five years or more -- you can probably cut your premiums dramatically by changing policies. Put any savings from reduced premiums into savings.
  

The Easiest Way To Make Money
The easiest, less stressful way to make money is to take advantage of time. For example, the time someone has between 23 years of age and 24 years of age can never be repeated. You can never use this time again to generate and compound interest. Saving $25 per month starting at age 23, represents only $300 per year or 82 cents per day. Lets assume the savings earn a conservative 6% interest. This money is deposited in a qualified retirement account (individual IRA, Roth IRA, 401(k) plan) so that the funds are not taxed on the interest earned. This is done year-in and year-out until retirement at age 67. At this rate you would have contributed $13,200 to the account and will have earned $51,407 in interest. Waiting until age 33, the contributions would have to be doubled to match the same total by age 67. Of course higher rates of return could be sought, but this would require higher levels of risk. If at age 34 contributions into a personal IRA were stopped and the amount directed into a qualified pension plan that fully matched the contribution, the return, assuming the same rate would be 48% higher, totaling $95,647. And this is with the same 82 cents per day contribution.

Don't let the $25 per month example mislead you. Years of compound interest, especially tax-deferred compound accumulation will result in much more money to withdraw than you put in. Think of the example in terms of accumulating between $64,000 and $95,000 for every 83 cents per day saved starting at age 23. A $100 per month could yield $408,630; $200 per month $674,694 and $300 per would put earning near the millionaire mark at $940,759. 

How Aggressive Should Your Savings Plan Be?
This question heavily hinges on four things: 1) the amount of time you have before your child begins college and 2) the amount of risk you are willing to incur. The more time you have, the more aggressive you can afford to be. If the stock market dips, as it certainly will, you will have time to wait for it to rise as it historically has. As your child grows closer to college, you should shift a portion of your investments into safer instruments like low-risk mutual funds, Certificates of Deposit, T-bills and bonds. That way, you'll keep earning interest without incurring an undue amount of risk and potential loss. Families need to also take into consideration the cost of education and other financial goals and responsibilities.


FAQ – Saving for College

Top

s Will saving for college limit the amount of financial aid my child receives?
s What are state prepaid tuition plans?
s What does it mean to diversify my investments?
s With more than one child to save for, how should my investment strategy change?
s With over $68 Billion in financial aid, do families really need to save for college?
s How much does a family need to save for college?
s How much should I save?
s How should I save it? 
s Should parents save money for college in the student's name because of the tax advantages?
s What is meant by Aggressive, Steady and Low-Volatility funds?
s Should I use a financial advisor?
s I only have a few years before my child enters college. How can I catch up on my education savings?


Q - Will saving for college limit the amount of financial aid my child receives?

Yes. Part of the formula used to determine financial aid awards from the federal government is your income and assets. Those who have savings will be expected to contribute more toward their children's education than those who do not. However, the formulas for determining this contribution count employment income far more heavily than savings, so the difference is usually not substantial. Regardless of savings, most families qualify for financial aid if they still have the need for it. Also, many scholarships are awarded without regard to financial need. Look to combine financial aid with your own savings. A family that saves will have the funds necessary to meet their expected contribution, while a family that does not save may have to borrow, with interest charges more than making up for their smaller expected contribution. In the long run, paying for college from savings and current income is less expensive than borrowing. In doing so, you and your children will be better off. 
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Q – What are state prepaid tuition plans?

Prepaid tuition plans, are offered by a number of states and allow families to pay for a future college education at today's prices. Each plan varies, but generally speaking, all allow parents, their friends and family members to purchase credits toward tuition at today's prices regardless of when their child goes to college. There are some drawbacks. Plans may require the savings be used at certain schools, generally public ones in your state. The policies used to cash these plans in for use at other institutions vary. You should check out the particulars of a plan before you commit. Also, prepaid tuition plans invest very conservatively. You could most likely save the same or a greater amount of money in other investment/saving instruments or a Section 529 plan while only incurring a slightly higher level of risk and not limit where your child goes to school.
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Q - What does it mean to diversify my investments? 

Simply put, it means do not put all of your savings in one investment instrument. Diversifying investments means spreading your savings dollars around in different savings instruments such as stocks, bonds, mutual funds, certificates of deposits (CDs) and money market accounts. By doing this, you add a level of security to your college savings through diversity. 
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Q – With more than one child to save for, how should my investment strategy change?

Your investment strategy will not be any different. You will have to save more each month or each year, but where you invest your money, how you diversity it and what you hope to save per child should remain constant. What is key here is to take a careful look at your budget, particularly the family’s spending and make saving for college one of your priority goals. You cannot control or predict interest rates but you can commit to saving. Remember saving is rewarded best when it is done early and often. 
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Q - With over $68 Billion in financial aid, do families really need to save for college? 

YES! Though it is true that financial aid is available for most students, increased college enrollment and ever-growing costs make it more and more important for families to save for post-secondary education. Few students actually receive a financial aid package that covers their entire education. Because of interest, educational loans are repaid for more than what was borrowed. By starting to save early and often, families will have more money for college than they invest. That's the power of compounding interest.
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Q - How much does a family need to save for college?

That's virtually impossible to predict with precision. However, there are a few factors that determine college costs. First is when your child will begin college. Tuition and fees are rising by an average of about 4 to 6 percent annually. Will your child attend a public or private school? Generally speaking, public schools are less expensive than private schools. The EAS Education Resource Center has created a Seven-Step Approach to Paying for College which will assist you in establishing a ballpark estimate of what your child's college education will cost and how you can build a plan to pay for it. 
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Q - How much should I save?

That's a tough question with no clear answer. Save what you can without overextending yourself or ignoring the need for retirement income and other family goals in the process. Be creative and dedicated to saving. Look at you family circumstances and see where you may be able to consolidate and save. Aim to at least save 5% of take home income. Encourage your kids, to participate by adding to the savings fund from their allowance or work. Encourage the extended family, especially grandparents to add to the college savings fund. Some families have made it a family tradition to build an ongoing family college saving fund that continues with each generation contributing. If you can manage $25 per week ($100 a month) without taking all the joy out of your life, then by all means do it. Certainly, there will have to be some spending cutbacks, but there is no need to break the bank altogether or to vanquish your recreational life while you save. As important as how much you save is how regularly you save. Make saving a habit. Treat it like a monthly bill. Put money into a college savings account every week, month or year and let compounding interest work for you.
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Q - How should I save it? 

This is the real question and opportunity. Saving for college is a schizophrenic pursuit. On the one hand you've got to invest aggressively enough to accumulate thousands of dollars by the time your child is ready for school. On the other hand this is your child's future we're talking about: You can't afford to lose one penny of principal. There are numerous savings instruments available, but choosing the right one for your family’s needs and level of comfort is difficult. Where you put your money should be determined by how much time you have to save and how much risk you are willing to incur. For example, “Aggressive” funds, are appropriate for long-term investors, while “Steady” funds are best suited for a three- to seven-year investment horizon. “Low-Volatility” funds fit well with shorter-term investment goals. Aggressive and Steady funds are geared to parents whose children range in age from birth to eight years old because this is when they can afford to take the most risk. By the time your child reaches high school age, and during the four years he or she is in college, safety will be your No. 1 concern. Here Low-volatility that are almost as safe as cash, but whose returns exceed what you would receive from a money market account or a certificate of deposit would be good savings decision. 

So read up on mutual funds, custodial accounts, Education IRAs, prepaid tuition plans, trust funds, savings accounts, savings bonds, stocks, bonds and all of your other options. See the EAS Education Resource Center, Financial Planning Web Sites.
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Q - Should parents save money for college in the student's name because of the tax advantages?

Probably not. Financial aid offices expect a higher contribution from the student's savings than from the parents' savings (35% from the student's versus 5.64% from the parents).
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Q – What is meant by Aggressive, Steady and Low-Volatility funds?

Aggressive funds return far above the average stock mutual fund. These are funds that deliver high long-range returns, regardless of their short-term volatility. These are funds that may more than make up for their short-term losses with excellent long-term gains. Steady funds are funds that can offer parents the best of both worlds: returns that consistently outperform the market and risk rankings that are far below that of the average aggressive stock fund. These are funds that provide strong returns without taking outsized risks. Low-volatility funds are best suited for short-term investing. Such funds are almost as safe as cash, but whose returns exceed what you would receive from a money market account or a certificate of deposit such as Treasury strips and low-volatility mutual funds. 
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Q - Should I use a financial advisor?

Another tough question. This will depend on family and personal circumstances. If you have a sound knowledge of personal finance and a couple of hours to devote to reviewing and updating your savings plan each month, then you might be able to handle things yourself. If this is not the case, then consider a financial advisor. Financial advisors not only lend expertise, they also provide an important impartial opinion in the savings process. Please see the EAS Education Resource Center, Choosing a Financial Planner.
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Q - I only have a few years before my child enters college. How can I catch up on my education savings? 

Trying to play the catch-up game with savings is dangerous. While it is possible to pay for an education when you haven't saved for it, it is infinitely easier when you have invested in a saving plan over the years. Many parents are surprised to discover how little they really need to put aside on a monthly basis to save for tuition costs. The less time you have to save the smarter and more conservative you need to be. While you may only cover a portion of your child's college costs, you can ensure that you'll at least be able to pay something. It's very important that you begin a savings plan as soon as possible. Time is the most valuable commodity in this process.

Parents should consult with a reputable financial advisor who can guide them through the process of saving for education. There are tax ramifications and other complexities with which parents need to be familiar. In addition, many states, universities, and consortia of universities offer tuition savings and pre-payment plans, which frequently are worth investigating. There are variations depending upon the state offering the program, and there may be tax liabilities associated with some of the programs. Some colleges and universities offer pre-payment programs of their own. These programs allow you to pay a lump sum to the college just before the student begins attending college, or even years before the student is ready to attend college. Parents also should become familiar with the new education benefit programs, such as the Education IRA, Hope Tax Credit, and Lifetime-Learning Tax Credit. 
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Academic Excellence Combats The Saving for College Dilemma for Less Prosperous Families

Your average middle class family has not paid a lot of attention to college savings plans. Tax shelters, for college or anything else, work best for people with higher incomes and cash to spare. If you're middle or upper-middle class, even if you cannot or will not save, you can now write off some of your college expenses on your tax return. This does not help kids from families that don't have money to put into tax shelters. The new tax credits help only people who have enough money to take advantage of estate and tax planning. The new tax credits give no special help to the working poor.

Pell Grants are Washington's principal aid program for students in need. In 1979, the maximum Pell covered roughly three-quarters of the cost of a public four-year college. In the early 1980s, however, Congress reduced the size of Pells-ironically, just when many states began to raise tuition costs. Would-be students saw their purchasing power shrivel. Funding was slowly restored to the Pells in the 1990s, but not as generously as before. The maximum Pell now covers only one-third of the average four-year cost.

In place of grants, emphasize has been placed on loans in financing college. In the long-run loans don't work as well for the poor as they do for the middle class. For example, low-income students have no experience with the significant debt that paying for a college and/or graduate education may entail. Many low-income student would rather take a full-time job and go to classes as part-time students when they can. This also makes these students odds on favored to not complete their educational potential. Since the mid-1980s, there's been a sharp drop in the portion of low-income students getting four-year degrees with more enrolling in two-year institutions.

Middle-income students are indeed finding the money, especially in new government programs. Nearly 40 percent of federal aid is now awarded without regard to financial need, reports the College Board. That reflects the great value of low-cost student loans which are now open to everyone, regardless of income. 

Many states are responding positively. California has expanded its scholarship program for students of modest means. California residents will be able to go to school tuition-free. Community colleges for C students; a state college for B students and up. The scholarships can also be used toward the cost of attending a private college.

Georgia provides free tuition, at a public college, to every student with an average of B or better in college-prep courses (English, math, science, social studies, foreign language). There's also a tuition award toward the cost of private colleges.

In Georgia, students qualify regardless of income, so middle-class kids have a leg up. Until this past July, the state program effectively excluded the poor. Now they qualify, provided they do well in college prep.

The point to be made here is that although the paying for college sweepstakes is tilted in the favor of more prosperous families, students can level the playing field a bit by excelling in their academic work.


Saving In Your Child's Name

Parents should carefully consider the financial aid implications before saving or transferring money into their child's name. If your children have any possibility of being eligible for financial aid, it is strongly suggested that you do not put assets in your children's names, regardless of the tax savings. In general, unless the family is certain that their child will not qualify for need-based financial aid, money should be saved in the parent's name, not the child's name because parent assets do not have as much of an impact as is usually assumed.

Far more families qualify for financial aid than most realizes. Families with incomes and assets in the six figures often receive aid or get a government-subsidized loan for their child. Over $68 billion in financial aid was awarded to families of all income levels in the 2000-2001academic year. And nearly 50% of all students receive at least a partial award. The only way to assure you won't get an aid package is to be shy about asking for one


If the family is without question, certain that their children will not qualify for financial aid, they should take advantage of all the tax breaks they are qualified. But be very careful about assuming that you won't be eligible for financial aid because you earn too much or have too many assets, since parents are often mistaken when they make this assumption.

Assets in the child's name has one major benefit, the tax savings due to the child's lower tax bracket. 

An asset in the child's name has two major risks; the transfer of assets from parents to child will result in a reduction in eligibility for financial and the child is not obligated to spend the money on educational expenses.

Setting up an account in your child's name can immediately cut your tax bill. Because the taxable income generated by the college account gets "split off" from your return and included in your child's 1040 instead. The tax savings can amount to big dollars, as your child will likely be taxed at a 15% rate for ordinary income and 10% for long-term capital gains. However, your child has to be the legal owner of the college fund for this strategy to fly with the IRS. So you'll have to make gifts to get money into the child's hands. You can gift up to $10,000 per child per year ($20,000 if both parents make a gift) without any gift tax consequences. The money can go to establish a custodial account in your child's name — with you as the custodian — under the Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). Another way to save in your child's name is through a prepaid college plan. 

Avoiding the Kiddie Tax
The so called Kiddie Tax only applies if your child: (1) is under age 14 and (2) has over $1,400 of taxable investment income (so-called unearned income). In this case, the first $700 of income is sheltered by the child's standard deduction. The next $700 is taxed at only 15% (10% for long-term capital gains). Only the excess over $1,400 gets hit with the kiddie tax, meaning that amount gets taxed at the parents' marginal rate. If there's no excess, there's no Kiddie Tax.

One way to ensure there is no excess, is to invest in low-dividend growth stocks, low-turnover mutual funds or even Series EE U.S. Savings Bonds, whose interest income is tax-deferred until the bonds are cashed in. Once your child hits age 14, you can cash out of any of these investments at his tax rate (probably 10% for capital gains). And all dividend income will be taxed at your child's rate, probably 15%, from then on as well. 

Loss of Control
Another drawback to putting money in your child's name is that your child must own the college fund for those tax savings to materialize. With a custodial account, the child will eventually gain unrestricted access to all that money (usually at age 18, 21 or 25 depending on state law and whether gifts were made under UGMA or UTMA). 

The loss of control problem can be surmounted by setting up a Crummey trust to function as the college fund, with you acting as trustee. You'll need a lawyer to set up the trust., but it should not be very expensive

With the Crummey trust, you make an annual college funding gifts to the trust. As with a custodial account, you can put in $10,000 annually ($20,000 if you are married) with no gift tax worries. After each annual gift, your child has the legal right to withdraw that year's gift (and that year's gift only) within a designated timeframe (30 days is standard). While trusts don't generally qualify for $10,000 annual tax-free gifts, Crummey trusts do because of the annual withdrawal possibility. As a practical matter, your child is not going to exercise the withdrawal right until he or she is no longer a minor. Until then, you can make all financial decisions on your child's behalf. 

The trust's investment income gets taxed on your child's return, even though the trust actually retains the assets. You will most likely want to distribute enough each year to pay your child's taxes. As with a custodial account, the Kiddie Tax must be finessed until age 14. The bottom line is that you gain the benefit of your child's lower tax bracket without exposing the college fund to your child's greedy little clutches. 

If your child the beneficiary of the trust does not go to college, you as trustee simply refuse to disburse any funds until he or she reaches ages designated in the trust document, which may be 30, 35 and 40. This gives your child plenty of time to "mature."

Here are several strategies to reducing taxes on a college savings fund. 

Crummey Trust Pro: Earnings can be taxed at child's rate while you maintain control	Con: Watch out for kiddie tax if child is under 14. Lawyer needed to draft the trust. Legal implications if you function as trustee; less control if you don't. After each annual gift, the child has the legal right to withdraw that year's gift (and that year's gift only) within a designated timeframe (30 days is standard).
Qualified State Tuition Plan Pro: Earnings are taxed at child's rate. No kiddie tax problems. May be able to lock in a tuition price. Eventually, withdrawals for college expenses may be tax-free as well.	Con: Returns may be sub-par. Not available in all states. Some plans only cover tuition. Flexibility and refund policies are concerns.
Hire Your Kid Pro: Great tax benefits. Kiddie tax not a concern. Best used as supplement to other tax-saving ideas.	Con: You must own a business. Difficult to justify paying enough to cover college expenses. Child must actually work and you will have to depend on child to save for college
Custodial Account in Child's Name Pro: Simplicity. Earnings can be taxed at child's rate	Con: Kiddie tax is an issue for children under 14. Child will gain unrestricted access to money at relatively young age without spending restrictions
Save in Your Own Name Pro: Simple. Money belongs to parent. If invested to produce long-term gains taxable at the 20% capital gains tax rate.	Con: No income-splitting tax benefits, except to the extent appreciated securities can be gifted to the child and have him or her pay the tax
Education IRA Pro: Earnings tax-free.	Con: Contributions limited to $500 per year. Eligibility phases out for donors who are joint filers with AGIs between $150,000 and $160,000 and singles with AGIs between $95,000 and $110,000. Grandparents, godparents and friend who meet the AGI eligibility criteria can contribute.
Borrow Pro: Borrowing via home equity loan offers potential tax break	Con: Loans must be repaid.
Drain Your Retirement Account Pro: Nobel in concept.	Con: You can borrow for college expenses, but you cannot borrow for retirement. Although tax rules have recently been liberalized, there may be a tax penalty for early withdrawals from your retirement account.

Saving in The Parent's Name

Saving in your own name does not mean that you have to pay a 36% or 39.6% tax rate on your college fund earnings. By following a buy and hold strategy with low-dividend stocks and tax-efficient equity mutual funds, you should be able to keep the tax hit at just a bit over 20% (the rate for long-term capital gains). 

Transferring securities to the child when it's time to pay the college bill can reduce tax bills even further. By transferring appreciated securities in your education fund to an account established in your child's name your son or daughter can sell the shares and pay a 10% capital gains tax which is better than the 20% tax you would pay. Be sure to observe the $10,000 gift rule. Your child can pay school expenses and you can cover the rest with a check to the school. Unlimited payment can made directly to the school each year without violating gift tax rules.
You can also achieve tax-deferral by carefully managing your investments. When you sell stock shares that have gained in value and been held long term to pay college bills, your profit will be taxed at only 20%. If available you should consider selling some stocks that have lost value at the same time. You will reduce your gains and possibly end up not owing anything. 
By following a buy and hold strategy with low-dividend stocks and tax-efficient equity mutual funds, families should be able to keep the tax bill to just a bit over 20% (the rate for long-term capital gains).

Another way to avoid any current tax liability is by keeping your stock shares and taking out margin loans to pay college expenses. Investing in tax-efficient mutual funds won't result in 100% tax-deferral, but you may be able to come pretty close. 

Before engaging any of these strategies, you should carefully review the Education Resource Center section Learning the Language -- Maximizing Your Financial Aid Possibilities Maximizing 

As with all family financial decisions, consult and work closely with your financial advisors to assure that any financial strategy you consider is appropriate for family goals, objectives and priorities. 


Hire Your Child

Because the formula used for awarding financial aid require a far greater share of a student's assets than of parents, families should be very sure that they will not receive school based financial aid before hiring their child as a strategy to save or pay for college. 
If your family has determined that they will not receive school based financial assistance hiring your under-18 college-bound child is an option that can be used as a tax advantaged means of paying for college. In order for a family to take advantage of this strategy, they must operate a business as a sole proprietorship or husband-wife partnership. The concept is that the child will save and invest some of the wages for college. The wages are exempt from Social Security, Medicare and federal unemployment taxes, and your child can use the standard deduction to shelter up to $4,550 of 2001 income from income tax. Under these circumstances, your child will most likely owe zero federal tax or no more than 15% on some of his or her wages. It should also be noted that the Kiddie Tax is inapplicable on earned income. 
The family business gets a business deduction for money that will be used to pay college expenses. Your income tax and self-employment tax bills are reduced and your adjusted gross income goes down as well. 
Once your child reaches 18, you can continue employing her or him during summer vacation, school breaks and holidays. After age 18, Social Security and Medicare taxes will be applied, but your child's standard deduction still provides shelter from income tax. There's no federal unemployment tax before age 21. 
If your business is not a sole proprietorship or husband-wife partnership, the child's wages will be subject to Social Security, Medicare and federal unemployment taxes, regardless of age. The standard deduction will however continue to create an income tax shelter for your child, and your business gets deductions for the wages and payroll taxes. 
Your child could also use their earning to fund up to $2,000 in annual Roth IRA contributions. The contributions (not the earnings) can later be pulled out tax-free to help defray his or her college expenses. Please note that the earnings cannot be pulled out tax-free to help pay college bills. Additionally, the earnings provide a jump-started retirement account. 
If your child is age 21 or older, no longer a dependent and still in college also an employee of your business and not an owner, you may be able to hand out up to $5,250 in annual education expense reimbursements. This employee fringe benefit is tax-free to your child, and you get a deduction on your business tax return. You should be warned that: (1) graduate courses don't qualify, and (2) if you have other employees you could would have to provide the same benefits for them as well. Consult with your tax adviser to take a careful close look at the rules under Section 127 of the Internal Revenue Code.

As with all family financial decisions, consult and work closely with your financial advisors to assure that any financial strategy you consider is appropriate for family goals, objectives and priorities. 

Too Late to Save

Few families are able to save enough to meet the college bill. Although the Education Resource Center does not suggest it, you can take withdrawals from a regular IRA to pay higher education expenses without having to pay the 10% penalty tax that usually applies to payouts before age 59 1/2. Income tax will still be owed on the amount of the withdrawal.
 
Roth IRA contributions can be withdrawn tax- and penalty-free. 

You can take out a loan against your qualified retirement plan at work. When available, this is a much better alternative than outright withdrawals from retirement accounts. As you repay the money, your retirement fund is restored. You maintain the tax-deferral advantage, and the interest payments go to you. You can generally borrow 50% of your vested retirement account balance, limited to a maximum loan amount of $50,000. Many financial planners discourage this approach because the withdrawn funds are not being invested or generating the same returns as the core account.

Many families use a home equity loan to help pay college expenses. You can generally borrow up to $100,000 and write off the interest as an itemized deduction. It is not a problem if you use the money to pay for college. This privilege is still available to those whose income is too high to qualify for the new college loan interest write-off. You cannot deduct interest on loan amounts in excess of the value of your home net of other mortgage debt. If you choose to use a home equity loan to help pay the college bill, financial aid experts suggest that the funds be assessed through a line of credit rather than a lump sum payment. The funds should not be disbursed to you until after you have completed and filed the FASFA. Otherwise, the funds will be counted as an asset with some portion allotted to the expected Parent's contribution. Please review The Education Resource Center, Understanding Financial Aid, and Maximize Your Financial Aid Possibilities for more detail.

Grandparents and other family members are generally interested in the success of your children. A number of grandparents today are in the position to write a check directly to your child's college to pay for his or her tuition without adverse gift tax consequences (room and board does not apply) and the usual $10,000 annual limit is waived under this circumstance.

If not an outright gift, grandparents may agree to the parents an interest-free loan. Tax rules are complicated for loans over $10,000. As long as the below-market-interest rate loan is under $100,000 and payable on demand, the arrangement will generally get acceptable tax results for all concerned. As with the case of all financial decisions, consult with your financial advisors and document the transaction so that it is clear both parties expect and intend repayment of the loan. 

As with all financial decisions, consult with your financial advisors.

Tapping Life Insurance to Pay for College

Parents are searching for paying for college solutions. Although variable life insurance (VLI), has been presented as a smart, tax-deferred college-savings vehicle, it isn't. VLI has some advantages, but so do other strategies that cost less. 

VLI is a tidy package for parents who want to start a college-savings program and also provide for their own retirement. That's in part because the IRS treats VLI investment accounts almost the same as tax-deferred retirement accounts (deductible IRAs, 401(k)s, SEPs, Keoghs and the like). However, VLI accounts have the added advantage of easier borrowing. There's no borrowing against IRAs. The same is true for most Keogh accounts. And while 401(k)s often allow borrowing, loans are capped at $50,000 and must be paid back within five years or right away if you leave the company.

One problem with VLI is that the premiums are nondeductible and there are substantial expenses involved. VLI offers life insurance coverage combined with a tax-deferred investment feature. Premium payments are spent on three things: 1) the cost of the life insurance, 2) various insurance company fees -- including sales and administrative charges, which are deducted from each premium payment and 3) the tax-deferred investment account. The balance after the first two are paid goes into the third. VLI may also require surrender charges for early cancellation which makes the VLI unattractive for college savings unless your college-bound son or daughter is quite young. 


Do You Really Need to Save for College? -- YES!!!

Being smart about how you save and distribute college savings, you can cut your tax bill by thousands of dollars. 

Financial Aid Implications
Should you save for college at all? The more you save, the less likely you are to receive financial aid. The same is true if your son or daughter has assets or significant earnings in his or her name. If you can afford to save for college, SAVE. 

Saving in Your Child's Name 
Saving in your child's name can cut your tax bill. The taxable income generated by the account is included on your child's tax return and not the parent’s. The tax savings can be significant, because your child will likely be taxed at a 15% rate for ordinary income and 10% for long-term capital gains. The child must be the legal owner of the college fund for this strategy to pass approval with the IRS. Under the Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) you can give each of your children up to $10,000 per year ($20,000 if both parents make a gift) without any gift tax consequences. The money can go to establish a custodial account in your child's name with the parent as the custodian. With a custodial account, the child will eventually gain unrestricted access to all the money in the account, usually at age 18, 21 or 25 depending on state law and whether gifts were made under UGMA or UTMA. You can also save in your child's name through a prepaid college plan.

The Facts
In saving for college, you really have two fundamental considerations. First you have to develop an asset allocation plan. Second, you have to think about ways to minimize taxes. Here are several strategies to reducing taxes on a college savings fund. 

Crummey Trust Pro: Earnings can be taxed at child's rate while you maintain control	Con: Watch out for kiddie tax if child is under 14. Lawyer needed to draft the trust. Legal implications if you function as trustee; less control if you don't. After each annual gift, the child has the legal right to withdraw that year's gift (and that year's gift only) within a designated timeframe (30 days is standard).
Qualified State Tuition Plan Pro: Earnings are taxed at child's rate. No kiddie tax problems. May be able to lock in a tuition price. Eventually, withdrawals for college expenses may be tax-free as well.	Con: Returns may be sub-par. Not available in all states. Some plans only cover tuition. Flexibility and refund policies are concerns.
Hire Your Kid Pro: Great tax benefits. Kiddie tax not a concern. Best used as supplement to other tax-saving ideas.	Con: You must own a business. Difficult to justify paying enough to cover college expenses. Child must actually work and you will have to depend on child to save for college
Custodial Account in Child's Name Pro: Simplicity. Earnings can be taxed at child's rate	Con: Kiddie tax is an issue for children under 14. Child will gain unrestricted access to money at relatively young age without spending restrictions
Save in Your Own Name Pro: Simple. Money belongs to parent. If invested to produce long-term gains taxable at the 20% capital gains tax rate.	Con: No income-splitting tax benefits, except to the extent appreciated securities can be gifted to the child and have him or her pay the tax
Education IRA Pro: Earnings tax-free.	Con: Contributions limited to $500 per year. Eligibility phases out for donors who are joint filers with AGIs between $150,000 and $160,000 and singles with AGIs between $95,000 and $110,000. Grandparents, godparents and friend who meet the AGI eligibility criteria can contribute.
Borrow Pro: Borrowing via home equity loan offers potential tax break	Con: Loans must be repaid.
Drain Your Retirement Account Pro: Nobel in concept.	Con: You can borrow for college expenses, but you cannot borrow for retirement. Although tax rules have recently been liberalized, there may be a tax penalty for early withdrawals from your retirement account.

The Kiddie Tax
The Kiddie Tax is applied only if your child: (1) is under age 14 and (2) has over $1,500 in 2001 of taxable investment income also known as unearned income. The first $750 in 2001 of income is sheltered. The next $700 is taxed at only 15% (10% for long-term capital gains). Only the excess over $1,400 gets hit with the Kiddie Tax, meaning that amount gets taxed at the parents' marginal rate. No excess, no Kiddie Tax. 

Financial advisors have suggested investing in low-dividend growth stocks, low-turnover mutual funds or even Series EE U.S. Savings Bonds, whose interest income is tax-deferred until the bonds are cashed in to assure that there is no excess. When the child turns age 14, you can cash out of any of these investments at his tax rate (probably 10% for capital gains). From then on, all dividend income will be taxed at the child's rate, which will probably be 15%.

State-Sponsored College Savings Accounts
Another tax-advantaged alternative for families seeking to pay the college bills are state-sponsored college savings accounts. Some allow you to invest as much as $100,000 in a child's account without paying a

A summary of business expenses which can be deducted for a small
business/self employed person is provided at the Internal Revenue
Service (IRS) website:


IRS.gov
Small Business/Self-Employed
Business Expenses
http://www.irs.gov/businesses/small/article/0,,id=109807,00.html
“What Can I Deduct?
To be deductible, a business expense must be both ordinary and
necessary. An ordinary expense is one that is common and accepted in
your trade or business. A necessary expense is one that is helpful and
appropriate for your trade or business. An expense does not have to be
indispensable to be considered necessary.”

---

“Cost of Goods Sold
If your business manufactures products or purchases them for resale,
some of your expenses may be included in figuring the cost of goods
sold. You deduct the cost of goods sold from your gross receipt to
figure your gross profit for the year.

If you use an expense to figure the cost of goods sold, you cannot
deduct it again as a business expense.

The following are types of expenses that go into figuring the cost of goods sold.

The cost of product or raw materials, including the cost of having
them shipped to you.
The cost of storing the products you sell. 
Direct labor costs (including contributions to pensions or annuity
plans) for workers who produce the products.
Factory overhead expenses. 
Capital Expenses
You must capitalize, rather than deduct, some costs. These costs are a
part of your investment in your business and are called capital
expenses. There are, in general, three types of costs you capitalize.

Going into business. 
Business assets. 
Improvements. 
Personal Expenses
Generally, you cannot deduct personal, living, or family expenses.
However, if you have an expense for something that is used partly for
business and partly for personal purposes, divide the total cost
between the business and personal parts. You can deduct as a business
expense only the business part.

Business Use of Your Home
If you use part of your home for business, you may be able to deduct
expenses for the business use of your home. These expenses may include
mortgage interest, insurance, utilities, repairs, and depreciation.
Refer to Publication 587, Business Use of Your Home.

Business Use of Your Car
If you use your car in your business, you can deduct car expenses.
Refer to Publication 463, Travel, Entertainment, Gift, and Car
Expenses.

Other Types of Business Expenses

Employees' Pay - You can generally deduct the pay you give your
employees for the services they perform for your business.
Retirement Plans - Retirement plans are savings plans that offer you
tax advantages to set aside money for your own, and your employees',
retirement.
Rent Expense - Rent is any amount you pay for the use of property you
do not own. In general, you can deduct rent as an expense only if the
rent is for property you use in your trade or business. If you have or
will receive equity in or title to the property, the rent is not
deductible.
Interest - Business interest expense is an amount charged for the use
of money you borrowed for business activities.
Taxes - You can deduct various federal, state, local, and foreign
taxes directly attributable to your trade or business as business
expenses.
Insurance - Generally, you can deduct the ordinary and necessary cost
of insurance as a business expense, if it is for your trade, business,
or profession.
This list is not all inclusive of the types of business expenses that
you can deduct.  For additional information, refer to Publication 535,
Business Expenses.”

 
*************************************************************


Other references:


IRS.gov
Publication 535
Business Expenses
http://www.irs.gov/pub/irs-pdf/p535.pdf


IRS.gov 
Publication 334
Tax Guide for Small Business
http://www.irs.gov/pub/irs-pdf/p334.pdf


IRS.gov 
Publication 463
Travel, Entertainment, Gift, and Car Expenses
http://www.irs.gov/pub/irs-pdf/p463.pdf



TurboTax.com
Taking Business Tax Deductions
What kind of small business tax deductions can I take for a business expense tax?
http://www.turbotax.com/articles/Taking_Business_Tax_Deductions.html?source=ttcommain
“You may be able to take more small & home based business tax
deductions than you thought.

Automobile expenses 
Bad debts 
Depreciation 
Employee expenses 
Home office expenses 
Insurance 
Interest 
Legal and professional fees 
Pension plans 
Rent 
Taxes 
Travel expenses”



SmartMoney.com
Tax Ideas for the Self-Employed
http://www.smartmoney.com/tax/workbusiness/index.cfm?story=taxideas&adSection=smallbusiness&nav=smallbusiness
“What kind of expenses can you pay and deduct before year's end? Let
your imagination run wild. Common items include office supplies;
postage; security monitoring; Internet access and online services;
stationery; business cards; advertising; business and professional
licenses; dues for professional organizations; Chamber of Commerce and
civic club dues (Lions, Elks, Women's Club, etc.); legal fees;
accounting; fees for tax preparation and advice; education and
training; 50% of business meals and entertainment; and business travel
expenses.

In a nutshell, the litmus test for deductibility is whether you would
have incurred the expense if you weren't in business. The general rule
for prepayments is no current deduction for any expenditures that
deliver value more than 12 months past year's end. For example, if you
renew your Wall Street Journal subscription for three years on Dec.
31, you can only deduct one-third of the price in your yearly return.
However, if you set a price break by prepaying for more than a year, a
court decision says you can generally deduct the whole amount in the
year you pay.”



Bankrate.com
A dozen deductions for your small business
http://www.bankrate.com/brm/news/biz/tax/20011022a.asp

Andréa Coutu

Finance

2006-06-03 23:49:08

Tax write off lists -- business tax write offs lists rarely cover everything the the United States Internal Revenue Service allows. If you need to put together a business tax write off list, start thinking about all your expenses and whether they help your business. Business expense write offs for tax purposes include the costs of carrying on business. You can write off legitimate expenses if you can realistically expect the business to make a profit. (And if you've set your consulting fees properly, you should have room for profit.)

Tax write off list details

Business expenses (tax write-offs) have to be "ordinary and necessary" -- common, accepted in your busines, helpful and appropriate. If your expense is partly used for personal reasons, make sure you only write off the business part.

Tax write off list

Here's a short list of business expenses you can write off for tax purposes. Be sure to check with an accountant to make sure your business tax write-off list is appropriate and necessary for you.

• Cost of Goods Sold -- the costs for products and raw materials, including shipping
• Storage costs for products you sell
• Labor costs for workers who make your products
• Factory overhead expenses
• Capital Expenses from going into business, acquiring assets and making improvements
• Business Use of Your Home
• Business Use of Your Car
• Employees' pay
• Retirement plans for you and your employees
• Rental expenses
• Interest
• Taxes (some)
• Insurance
• Advertising
• Stationery and supplies

Those are just some of the write-offs enjoyed by small businesses, like consultants. For more information on business write-offs, check out the following articles:

• Write offs from Business Week
• Writing off start-up costs from Microsoft
• Self-employment tax info from the IRS
• Business expenses and write-offs from the IRS
• Writing off business use of home from the IRS
• Writing off business use of your car from the IRS
• Some really detailed business expense write-offs from the IRS
• Overlooked tax deductions from Jackson Hewitt

You may also want to consider the steps to becoming a consultant. Good luck -- and remember, these are just some suggestions. Always check with an accountant or the IRS for tax advice.

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