Attention: Accountants and Financial Planners

We all understand that our clients have different needs at varied stages of life.  Here are a few issues with which you need to be familiar in helping your clients plan for college:

  • Don’t automatically use a Form 1040 if the family is eligible to file a 1040A or 1040EZ.  Using the simplified tax returns plugs right into the U.S. Department of Education’s Simplified Methodology for college need analysis.  In effect, if the parents file a short form and have an AGI under $50,000, the parent’s assets are exempt from the federal need analysis formula.
  • 529 plans are best for college savings.  These savings plans are counted as parental assets and are assessed at 5.62% (after the asset protection allowance) in need analysis as compared to a whopping 35% if counted as student’s asset as it would be with a UGMA or UTMA.
  • Avoid UTMAs and UGMAs! While these vehicles may save some taxes they get assessed 35% in need analysis.  If a student qualifies for aid, up to 35% could be forfeited because of UGMA/UTMA or other assets held in the student’s name.  The net tax benefits are paltry compared to the aid that could be lost.
  • Business owners with college students fare much better with regular C corporations than with S corporations or LLC. This is because income can be controlled with the regular corporation.  The tax advantages of an S corp. or LLC must be compared with the loss of financial aid when that K-1 or pass through income hits the 1040.  Consider these issues before you incorporate any client with college on the horizon.
  • Understand the importance of the base year.  This is the year that the federal government, College Board and colleges will use to decide the student’s financial aid award.  The base year starts from January 1st in the student’s junior year of high school and ends December 31st of the student’s senior year of high school.  This year will set the tone for all four years of financial aid packages.
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