Making Sense of College Savings

Saving for college is a daunting task. Over the past decade, tuition rates have been steadily rising and student financial aid is getting harder and harder to come by. The average college graduate had $26,500 of student loan debt in 2011, up almost 5% over the year before. To help ease the pain of rising tuition costs there are several college savings vehicles that help to save for college in tax-favorable ways. Let’s take a look at some of these plans.

A 529 plan is one of the most flexible ways to steadily save for college for your child, grandchild or other future student in your life. There are no income limitations on who can contribute to a 529 plan. Anyone can be an account owner and anyone can be a beneficiary. A contribution is considered a completed gift and is therefore excluded from a contributor’s estate. The contributions into the plan are not tax deductible but the earnings grow tax-free and there is no taxation on withdrawal as long as the withdrawal is used for qualified educational expenses.

529 plans fall under two categories – prepaid and savings. Prepaid plans lock in a tuition rate at an eligible public or private university. The contributions to the plan are only eligible to cover tuition and mandatory fees. Lump-sum installment plans are set up based on the beneficiary’s age and the number of years purchased; this is an advantage because it locks in lower tuition rate for the future. However, it impacts the student’s flexibility when choosing a university. Enrollment in these plans is also often limited to a certain time of year.  Read more

2012 Impact of California’s Prop 30

The people of California have spoken and Proposition 30 passed by a fair margin, roughly 54% to 46%. The question now is, “what does this mean for me?” In summary, Prop 30 means tax increases for all California taxpayers making over $250,000 per year (Single and Married Filing Separate filers) or $500,000 per year (Married Filing Joint and Head of Household filers.)

For Single and Married Filing Separate filers the new rates will be:

• 10.3% for taxable income between $250,001 and $300,000
• 11.3% for taxable income between $300,001 and $500,000
• 12.3% for taxable income above $500,000

For Married Filing Joint and Head of Household filers the new rates will be:

• 10.3% for taxable income between $500,001 and $600,000
• 11.3% for taxable income between $600,001 and $1,000,000
• 12.3% for taxable income above $1,000,000

In addition, the California mental health tax 1% surcharge on income over $1,000,000 remains in effect, so the top rate rises to 13.3% for these high earners.

These tax increases are retroactive to January 1, 2012 so planning now is essential to brace for higher balances due in April. With this new initiative passing combined with looming federal tax increases, planning this November and December is more important than ever! Contact your LMGW tax advisor right away to schedule an appointment.