1. ©2015, College for Financial Planning, all rights reserved. Session 13 Unearned Income Rules & Educational Provisions CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning

2. Session Details Module7 Chapter(s)1 and 2 LOs7-1 Identify characteristics of an intrafamily transfer or education incentive. 7-2 Analyze a situation to identify income tax implications of an intrafamily transfer. 13-2

3. Unearned Income Rules Taxpayer eligible to be claimed as a dependent: Not allowed to use own personal exemption Limited standard deduction ($1,050) allowed against unearned income With earned and unearned income, then standard deduction is greater of: o $1,050 or o earned income, plus $350 o up to amount of full standard deduction of $6,300 (2015) 13-3

4. Kiddie Tax Rules Child under the age of 19 Under age 24, if a full-time student o Kiddie tax doesn’t apply if earned income exceeds ½ of own support, or if child is MFJ o Child must have a living parent Against unearned income: o First $1,050 sheltered by limited standard deduction o Next $1,050 at child’s rate o Over $2,100 at parents’ MITB (if higher) 13-4

5. Intrafamily Transfers UGMA/ UTMA Investment account titled in minor’s name No trust necessary Custodian appointed without court proceeding Account distributions irrelevant— earnings taxed 13-5

6. Educational Provisions U.S. Savings Bonds Redeemed for qualified higher education Purchased by individual age 24 or older Exclusion limited by AGI (approx. $110,000 to $140,000 MFJ) No gift bonds American Opportunity (Hope) Tax Credit Maximum credit of $2,500 per student No Hope for dope Phaseout based on AGI—$80K to $90K or $160K to $180K Only for first 4 years of College Only can be used for 4 years 13-6

7. Educational Provisions Lifetime Learning Credit $2,000 maximum per taxpayer Available for unlimited years May be used for CE, etc. Narrow definition of eligible expenses AGI limits—$55K to $65K, or $110K to $130K Coverdell ESA Nondeductible contributions of $2,000 annually Generally tax-free distributions Broad definition of eligible expenses AGI phaseout—$95K to $110K or $190K to $220K 13-7

8. Educational Provisions Section 529 Plans (State Tuition Program) no AGI limit high overall contribution limit contributor or beneficiary may not “control” investment can change investment mix only twice per year roll over to different state every 12 months rollover may be allowed from UGMA or UTMA qualified distributions excluded from income 13-8

9. Review Question 1 Which one of the following statements regarding the American Opportunity tax credit is correct? a.The education expenses must be for the taxpayer, the taxpayer’s spouse, or a dependent of the taxpayer. b.There is a phaseout between $160,000 and $180,000 of AGI for single taxpayers. c.The credit applies during the first two years of postsecondary school. 13-9

10. Review Question 2 Which one of the following statements regarding the Coverdell Education Savings Account is not correct? a.Annual contributions of up to $500 per beneficiary under age 18 may be made. b.Contributions are phased out between $190,000 and $220,000 of AGI for married taxpayers filing jointly or between $95,000 and $110,000 of AGI for single taxpayers. c.Distributions that do not exceed qualified education expenses are tax free. 13-10

11. Review Question 3 Which one of the following is a characteristic of an intrafamily transfer that utilizes a Uniform Gift to Minors Act (UGMA) account? a.Income from such an account in excess of $2,100 is taxed at the child’s earned income tax rate if the child is subject to the kiddie tax. b.Income from such an account in excess of $2,100 is taxed at the parents’ marginal tax rate if the child is subject to the kiddie tax. c.A trust for the account is drafted in accordance with appropriate state law. d.A custodian for the account is named in a formal court proceeding. 13-11

12. Review Question 4 Which one of the following statements is correct with respect to earned income received by a child who is subject to the kiddie tax? a.The child has a limited standard deduction available (up to $1,050 in 2015). b.The child has up to a full standard deduction available ($6,300 in 2015). c.Any income that exceeds the total of the available standard deduction and $1,050 is taxable at the parents’ marginal income tax rate. 13-12

13. Review Question 5 Jan and Dan Hoffstra established an UGMA account for their son, Kyle. The account generated $3,700 of interest income during 2015. There were no distributions from the account during the year. Kyle, age 12, has no other income. Jan and Dan are married filing jointly, and have $120,000 of taxable income. Assuming that Jan and Dan do not report Kyle’s income on their own return, what is the amount, if any, of Kyle’s tax liability for 2015? a.$0 b.$505 c.$543 d.$663 13-13

14. ©2015, College for Financial Planning, all rights reserved. Session 13 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning