what advisers should know about education planning · benefit planning purposes (spousal benefit...

What Advisers Should Know about Education PlanningPresented by:Ross A. Riskin, CPA/PFS, CCFC

Personal Financial Planning Section

Tax | Retirement | Estate | Risk Management | Investments

Today’s Speaker

Ross A. Riskin, CPA/PFS, CCFC

• Assistant Professor

The American College of Financial Services

• Vice President

Riskin & Riskin, PC



2

Relevant Updates from TCJA



Updates from TCJA

• Tuition and Fees Deduction

– No structural changes. This deduction was extended for the 2017 tax year and is

set to expire in 2018 unless it is extended again in the future.

• Student Loan Interest Deduction

– No structural changes

• American Opportunity Tax Credit

– No structural changes; permanently extended

• Lifetime Learning Tax Credit




4

Updates from TCJA

• Distributions from Coverdell Education Savings Accounts (CESA)

– No structural changes.

• Distributions from US Savings Bonds


• Distributions from ROTH IRAs




5

Updates from TCJA

• Deductibility of Home Equity Indebtedness Interest

– No longer deductible as an itemized deduction for taxpayers

– Reduces effectiveness of using HEL, HELOC, or proceeds from cash-out refinance to pay

college costs or pay off existing federal/private student loans

• Death or Disability Discharge of Student Loan Indebtedness

– Amounts discharged after 12/31/2017 will not be included in gross income of the borrower

for federal and state income tax purposes



6

Updates from TCJA

• Distributions from Qualified Tuition Programs (529 College Savings Plans)

– Can be used to pay for Qualified Higher Education Expenses at eligible

institutions

– Eligible institution must participate in the Federal Student Aid program

– Tuition, Room and Board, Books, Supplies

– Can now also be used to pay for public, private, or religious elementary or

secondary school tuition

– Up to $10,000 in the aggregate per year per beneficiary may be treated as a

qualified distribution



7

529 College Savings Plan Example



8

Conor Sarah Michael

Grade 5th 7th HS Freshman

Type of School Private Private Private

Tuition Expenses $6,500 $9,000 $18,000

529 College Savings Plan Distribution $7,500 $9,000 $18,000

Qualified Distribution $6,500 $9,000 $10,000

Non-Qualified Distribution $1,000 N/A $8,000

Potential Issue with 529 College Savings Plan Changes

• Need to see if client still plans on using funds for college or wishes to use them earlier

• May need to reconsider age-based portfolios if the family plans on using funds to pay for

pre-college education expenses

• Already limited to two investment changes per calendar year

• Prediction: more accounts will be depleted before the students enroll in college

– Difficult for people to plan for the future when current obligations are expensive

– More people are questioning the value of a college degree

– Many still believe saving will ruin their chances of receiving financial aid



9

Financial Aid for Business Owners



Concept of Financial Need

• COA – EFC = Financial Need – Resources = Adjusted Financial Need

– $65,000 - $25,000 = $40,000 - $2,000 = $38,000 Adjusted Financial Need

• Expected Family Contribution (EFC)

– Student’s Contribution + Parents’ Contribution = Expected Family Contribution

– Federal Methodology (FAFSA) and Institutional Methodology (CSS Profile)

– Parents’ Income (FM): 22% - 47% (Taxable and Untaxed; Allowances Available)

– Parents’ Assets (FM): Up to 5.6% (Allowances Available)

– Student’s Income (FM): 50% (Taxable and Untaxed; Allowances Available)

– Student’s Assets (FM): 20%



11

Assessment of Business Net Worth

• Federal Methodology (FAFSA)

– Net worth of family-owned businesses with :

– fewer than 100 employees will not be assessed

– greater than 100 employees will be assessed

– Net worth of non-family-owned businesses will be assessed

– Family-owned = > 50% in the aggregate of all related persons (parents, kids, cousins, etc.)

– Net worth = What the business could be sold for today – debt owed on the business

– IRS Quick Sale Value Method allowed (20% discount)

– Combination of asset approach, market approach, and income approach



12



– Assessed even more favorably than other assets

– Business with a net worth of $250,000 would be adjusted to $112,000



13


• Institutional Methodology (CSS Profile)

– Net worth of family-owned and non-family

owned businesses will be assessed

– CollegeBoard Business/Farm Supplement

may be required as well



14

Assessment of Business Income


– Income is reported from the following business entities:

– Sole Proprietorship or Single Member LLC (Schedule C)

– Partnership (K-1 Information)

– S Corporation (Salary and K-1 information)

– C Corporation (Salary Only)

– Income is not reported from the following business entities

– C Corporation (Net Income)



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– Income is reported from the following business entities:

– Sole Proprietorship or Single Member LLC (Schedule C)

– Partnership (K-1 Information)

– S Corporation (Salary and K-1 information)

– C Corporation (Salary Only)

– Income is not reported from the following business entities

– C Corporation (Net Income)

– Parents’ portion of gross receipts of businesses are reported



16



– CollegeBoard Business/Farm

Supplement may be required

– Need to report three years of

information!

– Will also request copies of business

tax returns and supporting schedules

(1065, 1120, 1120S) - IDOC

– Business losses and certain

deductions will generally be

disallowed and added back to

assessable incomePersonal Financial Planning Section


17

Brown University (RI) Example



18

Strategies for Business Owners



Consider Hiring Their Children

• Consider hiring their children if they are able to perform legitimate job functions in

the family-owned business

• Keep income below $6,660 (2019-2020 FAFSA income allowance) and be aware

that all student income is assessed on the CSS Profile

• Not required to withhold Social Security or Medicare taxes if children are under the

age of 18 and employed in family-owned business

• Children can use earned income to open and contribute to a Roth IRA (non-

assessable asset, but be careful with distributions)



20

Consider Hiring Spouse

• Consider hiring spouse to perform legitimate job duties in the family-owned business

• May be beneficial to shift earned income to non-earning spouse for Social Security

benefit planning purposes (spousal benefit may be more, but it does not earn

delayed retirement credits!)

• While AGI should be as low as possible to qualify for need-based financial aid,

earned income should be as high as possible

– Higher earned income allows for higher Social Security and Medicare tax

allowance

– Employment Expense Allowance is only available when both spouses are

working in a two-parent household



21

Employment Expense Allowance

• Allowance is calculated as follows (two-parent families with two working parents):

– Lesser of:

– 35% x lesser of Parent 1 or Parent 2’s earned income

– $4,000 (Hit at $11,429 of income)

• Allowance is calculated as follows (two-parent families with one working parent):

– $0!

• $4,000 allowance alone automatically translates into an EFC reduction of $1,880

($4,000 income reduction x 47% income assessment rate)



22

Treasury Regulation 1.163-10T(o)(5) Election

• Effective strategy for business owners looking to borrow money to grow their

business

• Election treats HEL or HELOC debt as not being secured by the home

• Funds from HEL or HELOC should be used solely for business purposes

• Even more valuable due to the TCJA changes

• Can now make non-deductible below the line interest payments (HEL, HELOC)

deductible above the line (Deductible business expense)!

• May be a smart strategy to consider if client can qualify for more favorable loan

rates and repayment terms as compared to those available on unsecured business

loans or lines of credit



23

IRC Section 127 Educational Assistance Program

• Beneficial tax planning tool

– Tax-free assistance for employees ($5,250 maximum annual exclusion)

– Not subject to Social Security or Medicare Taxes

– Can be used for undergraduate or graduate studies that are not business related

• Requirements

– Written plan must be in place

– Cannot be discriminatory in favor of HCEs or their dependents

– Employees cannot be given a choice of educational assistance or monetary compensation

– 5% limitation for greater than 5% owners/shareholders



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• Additional requirements for children employees/participants of the business owner:

– Must be a legitimate employee of the business

– Must be 21 years of age or older

– Must not be claimed as a dependent of the parent owners for tax purposes

– Must not be more than a 5% owner of the business



25


• Detrimental financial aid planning tool

– Assistance received is counted as a Resource for financial aid planning purposes

– Assistance received reduces eligible expenses for qualified 529 college savings plan

distributions

• Better tool for families that won’t qualify for need-based financial aid

• Better tool for families that won’t qualify for education tax credits

• Better tool for business owners who wish to pay for graduate school

• Better tool for Grandparent clients who are also business owners

– No age requirement!



26

IRC 127 Educational Assistance Program Example



27

IRC Section

127 Plan Scenario

Company

Deduction

Income

Inclusion

Out-Of-Pocket Cost to

Company

K-1 Tax

Deduction

Net Income Reported by

Individual

Tax Liability/(Refund)

Incurred

No Paying $5,000 of Tuition $5,383 $5,000 $5,383 ($215) $4,785 $1,947

Yes Paying $5,000 of Tuition $5,000 $0 $5,000 ($200) ($200) ($60)

$383 $2,007

Out-Of-Pocket Company Cost Savings Net Tax Savings for Employee

Employer Assumptions:

45.3% Federal, State, and FICA Combined Tax Rate (Out-Of-Pocket)

7.65% Employer's Portion of FICA Taxes (Employer Liability)

Employee Assumptions:

4% S Corporation Owner

37.65% Federal, State, and FICA Combined Tax Rate (Employee Liability)

Business Entity Choice



Business Entity Choice – Tax Planning Considerations



29

Sole Proprietorship Partnership S Corporation C Corporation

Parent 1's Salary $50,000 $50,000 $50,000 $50,000

Parent 2's Salary N/A N/A $70,000 $50,000

Guaranteed Payments N/A $70,000 N/A N/A

Net Business Income (Parent 2) $100,000 $30,000 $24,645 N/A

1/2 Self-Employment Tax Deduction $7,065 $7,065 N/A N/A

Adjusted Gross Income (AGI) $142,935 $142,935 $144,645 $100,000

Standard Deduction $24,000 $24,000 $24,000 $24,000

QBI Deduction (20% x Net Business Income) $20,000 $6,000 $4,929 N/A

Net Taxable Income $98,935 $112,935 $115,716 $76,000

Federal Income Tax $13,645 $16,725 $17,337 $8,739

Self Employment Tax $14,130 $14,130 N/A N/A

Total FICA Taxes (Employee Only) $3,825 $3,825 $9,180 $7,650

Total Personal Tax Liability $31,600 $34,680 $26,517 $16,389

Business Entity Choice – Tax Planning Considerations



30


Net Business Income $50,000

FICA Tax Deduction $3,825

Net Taxable Income $46,175

Federal Income Tax $9,697

Total FICA Taxes (Employer Only) $5,355 $3,825

Total Personal and Business Tax Liability $31,600 $34,680 $31,872 $29,911

Business Entity Choice – Financial Aid Planning Impact



31


Projected Gift Aid (University A) $24,000 $24,000 $24,000 $33,000

Total Personal and Business Tax Liability (4 Years) $126,398 $138,718 $127,488 $119,643

Tax Liability Attributed to Dividend Distribution (5th Year) N/A N/A N/A $21,707

Total Projected Gift Aid (4 Years) $96,000 $96,000 $96,000 $132,000

Net Benefit (Total Gift Aid - Total Tax Liability) -$30,398 -$42,718 -$31,488 -$9,350


Parents' Cash and Savings $50,000 $50,000 $50,000 $50,000

Parents' Net Worth of Investments $100,000 $100,000 $100,000 $100,000

Parents' Net Worth of Business $100,000 $100,000 $100,000 $100,000

Family Size 4 4 4 4

Age of Oldest Parent 45 45 45 45

Number of Children in College 1 1 1 1

State of Residence CT CT CT CT

Student's Income and Assets 0 0 0 0

Federal Methodology EFC $36,296 $34,848 $36,387 $21,633

Institutional Methodology EFC $27,322 $25,981 $27,338 $16,468

Business Entity Choice – Financial Aid Planning Impact



32


Projected Gift Aid (University B) $8,606 $8,606 $8,606 $16,116

Total Personal and Business Tax Liability (4 Years) $126,398 $138,718 $127,488 $119,643

Tax Liability Attributed to Dividend Distribution (5th Year) N/A N/A N/A $21,707

Total Projected Gift Aid (4 Years) $34,424 $34,424 $34,424 $64,464

Net Benefit (Total Gift Aid - Total Tax Liability) -$91,974 -$104,294 -$93,064 -$76,886


Parents' Cash and Savings $50,000 $50,000 $50,000 $50,000

Parents' Net Worth of Investments $100,000 $100,000 $100,000 $100,000

Parents' Net Worth of Business $100,000 $100,000 $100,000 $100,000

Family Size 4 4 4 4

Age of Oldest Parent 45 45 45 45

Number of Children in College 1 1 1 1

State of Residence CT CT CT CT

Student's Income and Assets 0 0 0 0

Federal Methodology EFC $36,296 $34,848 $36,387 $21,633

Institutional Methodology EFC $27,322 $25,981 $27,338 $16,468

Retirement Contribution Considerations

• FAFSA and CSS Profile add back employee tax-deferred contributions to retirement

accounts (IRAs, SEP IRAs, 401(k), 403(b), etc.)

• Amounts reported on Lines 28 and 32 of the 1040 will be treated as untaxed income

• Employer contributions are not added back



33

Sole Proprietorship S Corporation

Net Business Income before Owner Salary $100,000 $100,000

Salary Paid to Owner N/A $80,000

Net Business Income before Other Deductions $100,000 $20,000

Employer's Portion of FICA Taxes N/A $6,120

1/2 Self-Employment Tax Deduction $7,065 N/A

Maximum SEP IRA Contribution $18,587 $20,000

Net Business Income $100,000 ($6,120)

AGI $74,348 $73,880

Retirement Plan Contribution Add-Back $18,587 N/A

Adjusted Available Income for Financial Aid Purposes $92,935 $73,880

*Note that this example does not factor in Federal, State, FICA, FUTA, or SUTA tax liabilities or other financial aid income allowances

Questions?

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