Blitz, Lee & Company | News | June- September 2006 Newsletter


	Quote: “The taxpayer-that’s someone who works for the federal government but doesn’t have to take the civil service examination.”
	-Ronald Reagan

	Highlights of the Tax Increase Prevention and Reconciliation Act
	Financial Planning for College
	Existing Student Loans
	Correction
	Family Employment

Financial Planning for College
Colleges awarding scholarships, grants, loans, and work-study programs based on the student’s financial need use the following formula: Financial need = cost of attendance - expected family contribution.

Cost of attendance is the total yearly cost including tuition and fees, on-campus room and board (or housing allowance and food allowance for off-campus students), books, supplies, transportation, loan fees, and miscellaneous expenses (including a personal computer).

Expected family contribution is dependent on the income and assets of parents and student.

Start the planning process as early as possible, but no later than the second year of high school. The following strategies will help to maximize financial aid awards:


Planning Strategies for Parents' Income
•	Shift income (for example, bonuses and capital gains) to the years prior to and after a student is in college.

•	Reduce your Adjusted Gross Income (by up to $3,000) by selling any capital assets that will generate losses in the year before you file the FAFSA application.

•	Don’t sell a personal residence even though the gain may not be taxable, because the gain is considered as untaxed income in the calculation.

Planning Strategies for Parents' Assets
•	Don’t withdraw from tax-deferred retirement accounts for college expenses.

•	Put excess savings into annuities, insurance contracts, and ROTH IRAs because they are non-assessable assets.

•	Accelerate expenditures for large cash items such as autos, computers, and home improvements to the year prior to filing the FAFSA.

Planning Strategies for Student's Income
•	Limit student’s income.

•	Sell appreciated assets that are in the child’s name before the senior year of high school.

•	Sell capital assets that generate losses (by up to $3,000) in the year before filing the FAFSA to reduce adjusted gross income.

Planning Strategies for Student's Assets
•	Make all investments in the name of the parents instead of the student.

•	Pay college costs by spending assets in a child’s name before spending parents’ assets. Spend student’s assets for educational expenses such as private high school, SAT review courses, summer camp, or even a computer.

•	Own a section 529 college savings plan in the name of the parents (better, a grandparent, aunt, or uncle) rather than the student.

•	Don’t receive large cash gifts, as they are counted as untaxed income and assessed at 50%.

Existing Student Loans
The interest rate on federal student loans will increase significantly on July 1, 2006. Take advantage of the Federal Consolidation Loan Program to combine your debt before July 1 and lock in a lower rate.

The Stafford Loan’s rate today is as low as 4.7%; for the Parent Loan for Undergraduate Students (PLUS), it’s 6.1%. Since the interest rates on these loans is expected to increase by about two percentage points July 1, it makes sense for students and parents to take a one-shot opportunity to refinance by consolidating their loans.

Correction
In the last newsletter we incorrectly indicated that a SEP plan exceeding $100,000 was required to file a Form 5500. This was incorrect. A SEP plan of any size is not required to file a Form 5500. Only Defined Benefit and Profit Sharing Plans with assets of $100,000 or more are required to file Form 5500.

Family Employment
Employment tax requirements for family members may vary from those for other employees. Some of the differences are as follows:

One spouse employed by another
Wages for services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding, Social Security, and Medicare taxes. The wages are NOT subject to FUTA.

Child employed by parents
Payments for the service of a child under age 18 who works for his or her parent in a trade or business are not subject to Social Security and Medicare taxes if the trade or business is a sole proprietorship or partnership in which each partner is a parent of the child.

Parent employed by child
The wages for services of parents employed by their children in a trade or business are subject to income tax withholding, Social Security, and Medicare taxes. They are NOT subject to FUTA taxes.

Social Security, Medicare and FUTA do NOT apply if the parent is paid for a service which is not a trade or business, such as domestic service. However, Social Security and Medicare taxes DO apply to domestic services if:


•	The parent cares for a child who lives with a son or daughter and that child is under age 18 or a child that requires supervision for a minimum of 4 continuous weeks in a calendar quarter due to a medical or mental condition.

•	The parent’s son or daughter is divorced, is a widow or widower, or is married to a person who, because of physical or mental condition, cannot care for the child during such period

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