Why Avoid EFC Opportunities Course

Transcription

1 1 Module 3 Why Avoid EFC Opportunities Course Non-Assessable Income And Assets Non-Assessable Income Rollovers Loan Proceeds (Example: Loans From A Cash Value Life Insurance Policy Gifts and support, other than money Veterans ( VA ) benefits not assessed (counts as student resource) Contributions to or payments from flexible spending arrangements, including Medical Savings Accounts (IM will assess these) Food Stamps Gifts paid to college for tuition (counts a student resource) Federal and state disaster funds Qualified Tuition Plan ( QTP ) withdrawal Financial aid proceeds Non-qualified deferred compensation contribution Insurance proceeds used for reimbursement of loss Federal and state disaster funds Employer Education Assistance Plan (IRC 127) not assessed but student resource

2 2 Non-Assessable Assets Retirement Accounts (IM may assess student retirement accounts) Life Insurance (Some IM might assess, check with schools) Annuities (Some IM might assess, check with schools) Sibling Assets (IM will assess) Restricted Bank Accounts Personal Items, computer, auto, etc. Personal Residence (IM assesses) Businesses less than 100 full time employees (IM will assess Financial Aid Not Used Family Farm (IM Assesses) Family Corp s, partnerships, etc. not assessed Investment Farms Are assessed Non-Assessable Income 1. Rollovers Withdrawals or rollovers that qualify as constructive receipt are assessed as income. Trustee to trustee transfers where no money is received or you receive money but roll the over within allotted time are not assessable. 2. Loan Proceeds such as loans from cash value life insurance are not assessed.

3 3 3. Gifts and support other than money are not assessable income. 4. Veterans ( VA ) benefits are not assessed but they count as a student resource reducing financial aid dollar for dollar (financial aid formula Module 1). 5. Contributions to or payments from flexible spending arrangements, including Medical Savings Accounts are not assessed. Institutional method will assess. Strategy Move: A best move you can make because contributions to a medical savings account reduce parents AGI which increases financial aid eligibility. Certain criteria must be me such as you must elect coverage under a qualifying high deductible health insurance plan, not covered by any other health plans, not be entitled to Medicare benefits, and not eligible as a dependent by another tax payer. This is for self employed persons. Basically the theory is by selecting the high deductible plan you save on health insurance premiums, put the savings into a medical savings account, and you self insurance for smaller medical expenses while your contributions grow. Contributions are both tax deductible and earnings tax free when used for qualifying medical expenses which are numerous. If you are self employed and don t have a MSA, you should look into it. 6. Food Stamps are not assessed. 7. Gifts paid directly to a college for tuition are not assessable income.. However, they are a considered a student resource and reduce financial aid dollar for dollar. Refer to the financial aid formula listed in Module 1. Cash gifts are assessable. Strategy Move: Many grandparents want to help their grandchildren with college expenses. Doing it the wrong way can have terrible financial aid consequences. Susan and John are grandparents and they want give $20,000 for college to their grandson, Henry. (a) If Henry will not qualify for financial aid consideration, then gifting money directly to the college will not reduce the grandparent s annual gift exclusions.

4 4 (b) (c) (d) (e) (f) If financial aid is in play, then gifting the money directly to the college reduces the financial aid by 100% of the gift amount because it is considered a student resource. Did you get this? This is not within the EFC calculation with the Financial Aid formula but a dollar for dollar reduction at the end of the formula. This is why you have to think through and understand how and where to apply the rules. Rather than paying the tuition, the Susan and John could buy an automobile, computer equipment, or other personal items that would not be assessed. Susan and John could lend the money to Henry, forgive the loan or gift the money to Henry to pay back any loans after college graduation. Henry borrows money to pay for school. Upon graduation, Susan and John gift the money to Henry who then pays off or pay down loan totals. Disaster example: Susan and Henry give Henry $15,000 for Christmas with idea that he will use the money for a car for college. Henry would be assessed 50% of the gift as income, or $7,500. In addition, if he waited to buy the car until after the FAFSA was filed, he would also be assessed 20% or $3,000 as a student asset. Susan and John could gift stock to Henry, he holds it, and after graduation sells it to pay off loans no financial aid reduction. 8. Federal and state disaster funds are not assessed. 9. Qualified tuition plan ( QTP ) withdrawals are not assessed including both interest and principal. 10. Financial Aid proceeds are not assessed income. 11. Non-qualified deferred compensation contributions are not assessed income. Strategy Move: By deferring income during college years in these plans, you can increase your financial aid eligibility. The value of your plan share does not count as an asset and current year s contribution is not assessed as untaxed income (remember Module 1). Current FICA tax cannot be deferred and must be paid. A possible disadvantage might be the unsecured

5 5 creditor status of your account relative to you ability to your eventual benefit election. 12. Insurance proceeds for reimbursement of a loss asset are not assessed but amounts received above the reimbursement amount for the lost asset should be reported as untaxed income if it is not taxed. 13. Federal and state disaster funds are not assessed. 14. Employer Education Assistance Plan (IRC 127) not assessed but student resource. 15. State payments for foster care and adoption are not assessed. 16. Job Training Partnership Act Benefits (JTPA) are not assessed income but considered a student resource. Non-Assessable Assets 1. Retirement Accounts (IM may assess student retirement accounts) are not assessed as assets. 2. Life Insurance (Some IM might assess, check with schools) cash values are not assessed. This is why some college planning advisors recommend moving countable assets into life insurance policies. This may or may not work. There is no guarantee you will receive the amount of financial aid you expect. However, life insurance can be a very useful reduction strategy when properly understood and executed where the primary emphasis with the product design focuses on the fastest cash value growth possible. Strategy Move: Consider using permanent cash value life insurance when these advantages and disadvantages are understood and fit into your financial plan. (a) Non-assessed asset at most colleges, check with any colleges you are interested in that use the IM method.

6 6 (b) (c) (d) (e) (f) (g) Tax deferred growth of the cash value, and when properly structured tax free access to the growth through policy loans (non-assessed). Systematic way to save for college while providing the family with a self completion college funding benefit through the taxfree death benefit. Possible protection from the claims of creditors. Disability riders can be added that help provide the completions of the college funding benefit. Guaranteed and competitive rate of return especially when compared to taxable saving options. Can be used as a collateral source. Possible disadvantages are; (a) (b) (c) (d) Limited liquidity in early years but overfunding and policy design can help reduce this concern. High costs when the person being insured has poor health. You should consider owning the contract and possibly insuring other family members (might not have self completion college funding benefit if this is your choice). Possible surrender charges if you cancel the contract early. Make sure you understand how the surrender charges work and you are thinking of life insurance as a short term financial move, then you should look elsewhere. Unnecessary expenses if the maximum death benefit is issued compared to the minimum allowable death benefit based upon the amount of your contribution funding plan. Make sure you receiving a Maximum Efficient Contract. An agent who understands the term can help you but one who does not may not be your best choice. 3. Annuities (Some IM might assess, check with schools) are not assessed assets. Strategy Move: Since annuities are not generally assessed in the EFC calculations, assessable assets such as CD s or cash can be converted to non-assessable annuities before the date you sign the financial aid form/s (life insurance contracts the same). The big advantage of an annuity is that

7 7 the earnings grow tax deferred. However, be careful to understand the surrender charges. You need to match when you think you might need the money with the surrender charge period. The longer the surrender charge, generally, the higher the potential earnings you will earn inside the annuity. Although favored with financial aid EFC planning, the disadvantage with all non-qualified annuities is possible taxes and penalty. As a general rule if you are under age 59 ½ you will pay a 10% penalty (IRC 72- t) on income growth in addition to ordinary taxes. But remember, when you are assessed with an asset for EFC purposes you can be looking at 47% up front, right now, guaranteed to happen whereas the penalty and tax may never happen. Also, the penalty and tax is only on the earnings. Your being assessed the 47% reduction in financial aid on the entire starting balance that would go into an annuity. 4. Sibling assets (IM will assess) are not assessable assets. When IM assesses, the assets are assessed at the Parents rate of 5.6%. Strategy Move: Parents can contribute assessable assets such as CD s to a Qualified Tuition plan such as a 529 in the name of the sibling/s. The sibling/s QTP would not be assessed in the FM method (FAFSA). Thus you moved an assessable asset to a non assessable asset. 5. Restricted bank accounts are not assessed. 6. Personal items such as computers, autos, and household items are not assessed. Any personal debt cannot be listed on the financial aid applications. 7. Personal Residence (IM assesses) are not assessed. Second or vacation homes are assessable assets. This includes a vacant lot/s that will be used for future residence site. Strategy Move: If you consider your houseboat or motor home a second or vacation home does it make sense if you are trying to qualify for financial

8 8 aid. If you deduct the interest ( what if there is little left) on Schedule A a residence mortgage interest, then you must report the value and corresponding debt on the financial aid application. Consider the results if you do and don t deduct the interest compared to the asset reduction on your financial aid report. If you don t deduct the interest expense you don t have to claim the asset. 8. Businesses less than 100 full time employees (IM will assess) will not be assessed. 9. Financial Aid Not Used is not assessed. 10. Family Farm (IM Assesses) is not assessed. a. Family Corp s, partnerships, etc.are not assessed when the family farm definition is me referenced below. b. Investment Farms are assessed at the value of assets such as land, buildings, machinery, equipment, livestock, and inventories. Any corresponding debt should also be reported. Strategy Move: A family farm is primarily defined as a family s principal place of residence and meets the material participation test listed on IRS Schedule F. If you have a situation, for example, you rent your land back to the family farm corporation or you live in town but you materially participate with the daily activities of the farm, contact the Financial Officer at the colleges you are considering to see how they treat this situation. For the land rental situation, you argue that you materially participate with the rental of the land and are subject to self-employment tax. As such, you are meeting prime criteria of a family farm. Therefore, the rental land should not be assessed an investment farm but as a family farm which is not assessable under FAFSA. For the residence in town, assuming your material participation you can argue that the farm (and buildings) should be excluded and that your residence in town should be listed as an investment asset with corresponding debt, if any.

9 9 Closing Non-assessable income and assets are an area where you can really lower your EFC with proper planning. When you reposition income/assets so they become non-assessable, carefully understand the advantages and disadvantages for possible EFC outcomes. Secondly make sure you consider the tax ramifications, if any, now and in the future. For example, a C Corporation is great for financial aid because FAFSA does not count income from a C Corporation. However, your future tax liabilities will change compared to some other business entity choices. Get some professional help. When you see how much you can save compared to what your return on investment can be, it is clearly the best investment you will ever make. Jim Kuhner me: Coach for College Circular 230 disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) 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 herein.