What You Need to Know About Your 2013 Income Taxes / The Biggest Changes You'll See on April 15

Tom Herman for the Wall St. Journal writes: Attention, early birds. It's time to start getting organized for one of America's least popular annual events: wrestling with income-tax forms and instructions

Jason Schneider

Attention, early birds.

It's time to start getting organized for one of America's least popular annual events: wrestling with income-tax forms and instructions.

On Jan. 31, the Internal Revenue Service began accepting returns for 2013. Officials expect to receive more than 148 million returns this year. If history is a guide, many of those returns will include costly errors.

Thanks to the ever-growing complexity of federal, state and local tax laws, regulations and court cases, it's easier than ever to make mistakes, including overlooking valuable tax breaks. The standard federal tax publication issued by CCH, a Wolters KluwerWTKWY +0.74% unit, now totals a record 74,608 pages, up from 73,954 pages in 2013—and about 60,000 in 2004.

"There were some big changes in 2013," especially for taxpayers in the top brackets, says Gregory A. Rosica, a tax partner at Ernst & Young. But even those who aren't affected by these changes may find the task more daunting if they had a major life change, such as a marriage, divorce or job loss.

Here are a few major changes and thoughts from tax experts on how to reduce your chances of bloopers:

Higher tax rates: They began last year for many high-income taxpayers on ordinary income, capital gains, interest and dividends.

For example, the top statutory rate on ordinary income rose to 39.6% from 35% the prior year. This affects singles with ordinary taxable income of more than $400,000 and married couples with more than $450,000 (or half that if married and filing separately).

Capital-gains rates became more complex.

But there remains a zero rate on capital gains and dividends "for taxpayers taxed in the 10% and 15% brackets for ordinary income," says the EY Tax Guide 2014. This can be surprisingly deep water. See IRS Publication 550 for more details (and there are many).For taxpayers in the highest bracket, the top tax rate on long-term net capital gains and qualified dividends rose to 20% from 15% the prior year. (To qualify as a long-term capital gain, the investment must have been owned for more than a year.)

Many upper-income taxpayers also will get hit by a new 3.8% "net investment income tax." This applies to the lesser of net investment income or the excess of your adjusted gross income (with certain modifications) over $125,000 if married filing separately, $250,000 if married filing jointly and $200,000 for any other filing status.

And there is also an additional 0.9% Medicare tax on wages, other compensation and self-employment income.

Stealth taxes: There are new limits on itemized deductions and a phaseout of personal exemptions for taxpayers with income above certain amounts.

They're known as stealth, or backdoor, increases because they typically attract less attention among voters than tax-rate increases.

For example, the maximum personal exemption for 2013 is $3,900 per dependent. But you lose at least part of it if your adjusted gross income is more than $250,000 for singles, $300,000 for married individuals filing jointly, or $150,000 if married filing separately. The personal exemption phaseout is known as PEP for short. The limits on itemized deductions are known as "Pease," after a former Ohio congressman.

Medical expenses:Many people under 65 with large medical bills will discover they can't deduct as much as they could a year ago.

That's because the threshold has increased. For 2013, taxpayers under 65 can deduct their unreimbursed medical and dental expenses only to the extent they exceed 10% of adjusted gross income. That's up from a 7.5% threshold the previous year.

Example: Suppose you had $5,000 of unreimbursed medical bills last year. Your adjusted gross income for 2013 was $50,000. Result: You couldn't deduct any medical bills because your bills didn't exceed 10% of your adjusted gross income.

But the threshold generally remains 7.5% if either you or your spouse were 65 or older—unless you are ensnared by the alternative minimum tax.

Home sweet home: Did you work from home? If so, you might benefit from "a new, simplified home-office deduction form," says Mr. Rosica of Ernst & Young.

He is referring to an optional new method to calculate the deduction. Tax experts say it's simpler and eliminates burdensome record-keeping rules.

But, as Mr. Rosica points out, "it limits your deductions to $1,500." Thus, many people may be better off choosing the more complex, old-fashioned way. See IRS Publication 587.

EITC stands for earned income tax credit, a program designed to help the working poor. It's aimed at millions of individuals and families who made $51,567 or less last year. But the IRS has estimated about one out of five eligible workers and families miss out on this credit.

"Many people don't realize they are eligible and simply overlook this credit," IRS Commissioner John Koskinen said.

Some don't claim it when they file, while others don't file at all because their income falls below the filing requirement. To get the credit, you have to file. The EITC is a "refundable" credit, which means you may get a refund even if you don't owe any tax.

"One-third of the population eligible for EITC shifts each year as their personal circumstances, such as work status or family situation, change and can affect eligibility," the IRS said.

The amount depends on income, family size and filing status (visit www.irs.gov/eitc).

"Last year, over 27 million eligible workers and families received more than $63 billion total in EITC, with an average EITC amount of $2,300," the IRS said.

Same-sex couples: Following a major Supreme Court decision last year, the IRS issued a revenue ruling on the subject.

"If you have a same-sex spouse whom you legally married in a state (or foreign country) that recognizes same-sex marriage, you and your spouse generally must use the married filing jointly or married filing separately filing status on your 2013 return, even if you and your spouse now live in a state (or foreign country) that does not recognize same-sex marriage," the IRS says in Publication 17.

Some people might even be eligible to file amended returns to change their filing status for certain earlier years.

Electronic filing:"The best way to get your refund is to e-file your return and opt for receiving your refund via direct deposit to your bank account or another designated account," says Barbara Weltman, an attorney and author of J.K. Lasser tax guides.

E-filing also typically results in far fewer errors than returns filed on paper. And when you e-file, you get an IRS acknowledgment that your return has arrived.

Surprise! The Gain on the Sale of Your Home May Be Taxable

Sally Harigsted for the Motley Fool writes:  Since 1998, most people haven't had to worry about owing taxes when they sell their home, even if they clear a hefty profit when they do so. There's no longer any need to buy another house to roll over any gain, and in many cases the taxpayers don't even have to report the sale of their homes on their tax returns.

You can still owe tax on some or all of the gain from the sale of your home, however. Tax will be due if one or more of the following are true.

1. You didn't own and live in the house for two of the last five yearsIf you sell your home at a gain before two years are up and you don't qualify for any of the exceptions, you pay tax on the gain.

Exceptions: If you have to move because of health, a job transfer, or other unforeseen circumstances, you may still be able to exclude your gain. The maximum amount you can exclude will be prorated.

For example, let's say you were single and you owned and lived in a house for one year before you were transferred by your employer to another state. You met the requirements for 50% of the two-year time period. You can exclude up to $125,000 of gain from the sale ($250,000 times 50%.)

2. The house appreciated in value when you were not living in itPrior to 2008, you could have a vacation or investment home for years -- decades, even -- and watch it go up in value. So long as you moved into it for two years before you sold it, you could exclude up to the maximum amount of gain. That loophole has been closed. You cannot exclude gain from while you were not living in the house. For this purpose, the house is assumed to have gone up in value the same amount every year while you owned it.

3. The house went up in value more than the exclusion amountIt's not far-fetched, especially in some parts of the country. The amount of gain you can exclude from the sale of a home is $250,000 ($500,000 if filing jointly). A home can go up in value more than $250,000, or $500,000 if you are filing jointly. You'll pay tax on the gain over that amount.

4. It wasn't your main residenceThe rules for excluding gain on the sale of your home only apply to your main residence. If you have a second home or any other home or investment property, you may owe capital-gains tax when you sell.

5. You or your spouse already took an exclusion within the last two yearsYou can't take this deduction more often than once every two years. This rule can catch people unawares, especially if one spouse sold a home before they got married. In that case, you'll want to wait until two years after the sale before you sell another house at a gain.

Excluding a gain on the sale of a home is still one of the best deals in the tax code -- when you meet the requirements. Make sure you stay within the rules, if possible, to avoid any surprise gain when you file your return.

Do you live in fear of an IRS audit?: 5 red flags to avoid on your return

Rick Rogers for the Mail Tribune writes: It is no secret that one of the biggest fears people have is receiving an audit notice from the IRS. It ranks right up there with being diagnosed with a life-threatening illness. Of course, the IRS does nothing to alleviate this fear because the more frightened you are, the less likely you will be to cheat on your taxes.

The IRS audited 1 out of every 104 tax returns in federal fiscal year 2013. It's becoming increasingly evident that the greater your total income, the more you'll attract the agency's attention. Last year, the IRS audited about 10.85 percent of taxpayers with income greater than $1 million. The audit rate dropped to 0.88 percent for those with income less than $200,000.

Some of the audits were taxpayers pulled at random. The rest of the returns are selected for examination in a variety of ways.

Lowering your IRS profile will help minimize your chances of being audited. Here are five ways to help you stay off the audit list.

1. Large itemized deductions: The IRS has established ranges for the amount of itemized deductions based on a taxpayer's income. Deductions that exceed the statistical "norm" for a given state and region may be red-flagged for a closer look. This does not mean that you shouldn't take legitimate deductions. Your deductions could exceed the IRS range due to high medical expenses and large charitable contributions.

Take all valid tax deductions — just be sure you keep your backup documentation.

2. Self-employment income: The IRS believes that the vast amount of underreported income occurs among the self-employed. Self-employed taxpayers are audited by the IRS far more frequently than those who receive a W-2 for wages. People who are employed by others and receive W-2 income but also run a business that reports a loss are especially high on the IRS radar screen. You will need to be able to prove you are operating a business with the intention of earning a profit and not just trying to write off the expenses of a hobby. You will need to be able to pass both the "passive loss" and "hobby loss" rules in order for the deductions to stick.

3. Business expenses: Big deductions for business meals, travel and entertainment are always ripe for audit. A large write-off will raise red flags if the amount seems too high for the business. Taxpayers claiming 100 percent business use of a vehicle is also a huge red flag. The IRS knows it's extremely rare for an individual to use a vehicle strictly for business. The IRS looks for personal meals or claims that don't satisfy the strict substantiation requirements.

4. Rental properties: The IRS is scrutinizing rental real estate losses for those who claim to be real estate professionals. You must meet two requirements: 1. More than half of the personal services are performed in real property trades or businesses in which you materially participate, and 2.You perform more than 750 hours of services in real property trades or businesses in which you materially participate.

5. Home offices: Taxpayers who operate a business from their home are entitled to deduct the portion of their home that is dedicated to operating the business. The IRS believes that many taxpayers use this deduction as a means of writing off personal expenses and carefully scrutinize tax returns that claim the home office deduction. Claiming this deduction greatly increases the chances that your tax return will be audited. You should consult a tax expert to determine if you are entitled to claim this deduction. If the tax savings are minimal you may opt not to claim the deduction simply to avoid the scrutiny. For details, see IRS Publication 587.

There is no way to completely audit-proof your return, and if you do get an audit notice from the IRS, don't take it personally. It does not mean the IRS believes your return is fraudulent. When you get a notice, pick up a copy of IRS Publication 1 "Your Rights as a Taxpayer." Be courteous and helpful without volunteering more information than what is requested. Plan ahead so that you are organized and can answer questions promptly. Ask for a postponement if you need more time to prepare.

If you are a self-employed taxpayer or have unusual circumstances that place your return outside of the statistical norm, let a professional prepare the return. Self- prepared returns are themselves more likely to be audited. The IRS believes that a non-professional has limited knowledge of the 4,000 pages of tax code.

Tax law is complex. The fee charged by an enrolled agent or CPA can be easily justified by the peace of mind they bring if you get the dreaded audit notice.

Best Tax Apps for the iPad and the iPhone

Ted Needleman for Tablet PC Review writes: Every year it gets easier to do your taxes yourself: to prepare them, that is, even if it's not any easier to pay them! Given the huge adoption of tablets and smartphones, many tax returns are going to be prepared this year on a tablet or a phone rather than a Windows PC or Mac.

Here's an updated, hands-on look at tax preparation apps and utilities that you can run on youriPad or iPhone to ease the pain of figuring out whether you're going to get a refund or not.

Although we've reviewed them on an iPad, the six apps mainly featured in this roundup will operate on either an iPad, iPhone, or iPod touch. We've also gone hands-on with an assortment of utilities -- for estimating your taxes, getting answers to tax questions, and storing your returns online, for example -- that are compatible with all three platforms.

In addition, as we'll see, the three top makers of tax prep software -- Intuit, 2nd Story Software, and H&R Block -- now offer iPad-only apps. Somewhat similar in functionality to the online editions of the vendors' software, these iPad-only apps are capable of supporting complex as well as simpler returns.

Let's move on to the specific apps.

TurboTax SnapTax (Intuit)Federal return and e-file/free; state e-file/$14.99

Offeried in online, desktop, and mobile editions, TurboTax is easily the best known and most widely used do-it-yourself (DIY) tax prep software in the world. Product include TurboTax SnapTax and TurboTax for iPad, for instance.

The iOS edition of SnapTax -- compatible with the iPad, iPhone, and iPod touch -- isn't suitable for everyone, something that is also true of most other tax software supporting all three devices. You can only use it if you file a Form 1040EZ return. That return puts certain constraints on who can file. You need to have income under $100,000 ($120,000 if you are married filing jointly), and you can't itemize. You need to take the standard deduction. You can't use Form 1040EZ if you have dependents, either, or if you have non-W-2 income such as pensions. The sole exception is if you collect unemployment.

Assuming that you qualify, though, using SnapTax is a literally a snap. W-2s are entered by taking a picture of them. SnapTax then uses OCR (optical character recognition) to extract the data from the form and enter it into the tax return. You can have multiple W-2s.

For expanded views of the screenshots at right, please click on the images.

However, I had trouble getting a usable photo. SnapTax kept telling me that the OCR failed. Finally, I found a dark folder to place the W-2 on, and I got the lighting just right. SnapTax still missed some of the information on the W-2 (the print was somewhat light), but you need to verify the data anyway, so I was able to enter the information that was omitted. The data that SnapTax did recognize was completely accurate.

The iPad-only TurboTax app comes in three flavors: Deluxe, Premiere, and Home and Business. Much like the online and desktop editions of TurboTax software, TurboTax for iPad guides you through the tax prep process in a step-by-step way and tries to help you find credits and deductions. The app also supports file sharing through iTunes for transferring returns between an iPad and a PC or Mac.

Intuit also offers several free utilities for iOS that you might find useful in the tax preparation process: My Refund, TaxCaster, and It's Deductible. My Refund lets you check on what's happening with your refund, while TaxCaster lets you enter your approximate income at any time and gives you some idea of what your tax liability will be. That's handy if you think you might owe money at the end of the year and you want to do a quick approximation to see if you should add more withholding.

It's Deductible lets you record and estimate the value of noncash charitable donations so you can accurately claim them as deductions,

TaxACT Express (2nd Story Software)
Federal return and e-file/free; state e-file/$7.99

TaxACT also offers a complete line of desktop, online, and mobile tax preparation products. These include TaxACT Express -- a cross-device iOS app in the same general category as TurboTax SnapTax and TaxSlayer GO -- as well as TaxACT Free Federal Edition for iPad.

Yet although TaxACT Express runs on the iPhone and iPod touch along with the iPad, it is designed to support not just simple returns but some more complex situations. The app can handle W-2 forms, dependents & dependent credits, interest income, dividend income, unemployment compensation, education credits & deductions, Earned Income Credit, and Saver's Retirement Credit.

Easy to use as well as relatively comprehensive, TaxACT Express also offers great pricing of $7.99 for state e-filing.

TacACT Free Federal Edition for iPad also offers free federal return and e-filing, but state e-filing is priced at 14.99. Features of the iPad-only app include tax guidance for one "life event" of your choice (plus hurricanes and other disasters); a college financial aid worksheet; TaxACT Alerts and Examiners, for warning you of missed opportunities and potential errors; and a tax glossary containing over 300 terms.

To go along with its return preparation products, TaxACT also provides several useful free utilities, including the TaxACT Central app for iOS. It's easy to become disorganized during tax season. What are the deadlines? Did I receive all my documents? Have I filed all of them? TaxACT Central is designed to let you keep track of all that. It offers a checklist of tasks that need to be accomplished, lets you check the status of an e-filed return, and allows you to create a Free Federal or Deluxe Edition account on the vendor's website. There's even a tab that lets you get answers to the most common tax and return related questions.

Another cool tool for iOS is the DocVault app. This gives you a free online account that lets you save encrypted copies of your returns, and also snap photos of receipts and other supporting images that you might need when preparing your return.

If you do your tax return using the Web-based TaxACT Deluxe, you can import and attach these DocVault images to the return so you have substantiating evidence of your expenses. These images aren't transmitted along with your return when you e-file. They are just for your own use.

H&R Block Tax Preparation 2013 (H&R Block)Federal Free Edition/free; state e-file/$27.99

H&R Block is the best known name in tax preparation, even though it doesn't hold the number one spot in tax prep software.

The H&R Block app for the iPad, iPhone, and iPod touch will let you prepare a simple return, but the navigation could be improved considerably. If you are going to need information, or know about how to enter something, the time to tell you about this is before you actually do the entry, not several fields later. I found this annoying when doing a simple return.

For example, upon creating an account, I deliberately chose a password containing my username. First the software told me that the password was too weak. Then, after I added a few special characters, finished the screen, and tried to create the account, I received a message that the password could not contain my username at all.

Given that apps from other vendors are at least as inexpensive or even less expensive, and not as frustrating, you might want to skip this app and use either another vendor's iOS app or one of Block's online, desktop, or iPad-only editions.

H&R Block's iPad-only app is called -- what else? -- H&R Block for iPad. Similar in UI (user interface) to H&R Block Deluxe Online, this was the first iPad app to allow you to access the same return from an iPad and a PC.

TaxSlayer GO (TaxSlayer)Federal return and efile/free; state efile/$23.99

In many ways, TaxSlayer GO -- another app for the iPad, iPhone, and iPod touch -- is very similar to TurboTax SnapTax. Both limit you to filing Form 1040EZ, which means that you can only have wage and unemployment income.

TaxSlayer GO is also free, though e-filing in a supported state (there's a list on the TaxSlayer website) will cost you about $24.

Because the 1040EZ form is very simple, so is the return preparation process. As with SnapTax, you take photos of any W-2s you have received and enter any unemployment benefits you've gotten.

But also as with SnapTax, I had trouble getting my test W-2 to OCR, most likely because of light print on the form and not enough contrast between the W-2 and the surface it was on. I used the same technique with TaxSlayer GO as I did with SnapTax's dark folder for the background and a bright light.

TaxSlayer GO picked up slightly less data than SnapTax, but as with the TurboTax product, I was given the opportunity to check the results and edit/enter where necessary. The information picked up with the OCR was accurate.

TaxSlayer also offers a free Tax Refund Calculator utility that you can access on its website. It asks you questions about your income (and your spouse's if you have one) -- along with withholding and expenses -- and it estimates what you will owe or get as a refund. I found the sliders here clumsy to use, but you can simply enter the figures in the boxes at the right end of the slider.

The Tax Refund Calculator is just an estimator, but if you have fairly exact figures, it will give you fairly accurate estimates. It doesn't, however, calculate any deductions. You need to do that yourself and enter the calculated amount into the utility.

Ask a Tax Preparer (CPAdirect Marketing, Inc.)Free

The title of this free app is also its description. Available for both the iPhone and iPad, it links with a site owned by the National Directory of Registered Tax Preparers and Professionals, Ltd.

Human tax preparers register with the site. When you enter a question into the application and hit send, it goes to one of the preparers who has signed up with the site. You don't get to choose where your question goes, nor do you have any control over who answers it and what their qualifications are.

There's also no telling how quickly your question might be answered. Depending on who your question gets routed to, it might be some time before you receive a response. And when you do, there will probably be a pitch by the respondent for their tax preparation services.

There is also an archive of past questions which you might find useful, and the site lets you find a tax preparer near you based on the zip code that you enter when asking for a referral.

Ask a Tax Preparer offers some useful information, but you can probably find answers just as well and easily by using a search engine like Google or Bing. Even most tax preparation apps have a help facility that will let you ask a question, either to a knowledge base, the vendor's support staff, or a user community. Since most questions come up while you're actually preparing the return, chances are you're not going to want to wait around an undetermined time for the answer.

iDonatedIt (BMG Certified Public Accountants, LLP)
$2.99

iDonatedIt was the only one of the applications we reviewed that we had to pay for up front. That's too bad, since I think most people will see the value in it and pay for it after using it once.

Like Intuit's It's Deductible, iDonatedIt lets you estimate the value of noncash contributions. Although It's Deductible is Free, I much preferred iDonatedIt.

Many of us make noncash donations. It might be stuffing the occasional bag of used clothes and shoes into one of the ubiquitous large bins scattered everywhere, or dropping off a chair you replaced at a Goodwill Store.

If you itemize deductions, the IRS will let you take a deduction for a noncash donation. Figuring out what its value is, though, is difficult. Even if you paid $50 for a fancy shirt, its value when you stuff it into a collection bin is nowhere near that amount.

iDonatedIt lets you itemize your noncash deductions and put a value on each of them. It has numerous categories of likely items including clothes and appliances, and it provides a useful valuation on the item based on condition.

For example, a Men's Casual Shirt was valued at $3 in Good condition, $5 in Better condition, and $7 in Best condition. You can (and should) attach a photo of the item in case the deduction is questioned, and there are fields to enter the date and charity information (which is required in the tax return).

Members of my family frequently cull the closets for items we don't use any more, and we also give away unused appliances and the like to worthwhile organizations. For the most part, I haven't bothered to take this deduction, simply because I didnt want to try to value everything.

Next time, now that I have this handy little three-buck app, it will be different. I don't begrudge the years I didn't value and take noncash deductions. I'm happy if a donation provided something useful to someone in need.

But when it comes to preparing my tax return, I have no qualms about taking any and every deduction to which I'm entitled.

Nice job, BMG CPAs!

529 vs maxing out 401k?

Over at Bogleheads we came across the following discussion: 529 vs maxing out 401k?

529 vs maxing out 401k? Have pension as well...by AA_55 » Sat Feb 08, 

2014 2:29 pm

I have about 20 years to go until retirement. I'm comfortable that my current 401k and Roth IRA contributions, along with a significant CalPERS pension, will set me up fine for retirement. I have a 3-year old daughter; I'd like to start saving for her college expenses. I am not maxed out on my 401k or IRA contributions. I do not get an employer match on my 401k. Both my IRA and 401k have pretty low fees.

Is there any reason for me to consider a 529 fund for the college savings, or should I contribute more to my 401k and IRA, then in 15 years take a loan or early withdrawal from either of those to pay for college? I realize that there is an early withdrawal penalty (I'll be around 50 at that time) for the 401k, and I'll also have to pay tax on the earnings. But, I was thinking this may be offset by the ability to more easily obtain college financial aid since the retirement accounts shouldn't negatively affect financial aid eligibility. However, if we are able to obtain financial aid, but also pull funds out of the IRA or 401k, then that would be counted as income and we may have a harder time getting financial aid the next year.

It certainly seems at face value like it would be better to go the 529 route, but I'm hoping I'm not missing something obvious. And of course, there's always the chance she might not go to college (or other higher education)- I think that's a pretty minimal chance, however. Also, I'm in CA, so I get no deductions for 529 contributions. My goal is to be able to save roughly 50% of a typical 4-yr UC education.

I know it's generally recommended to max out retirement contributions prior to college savings, but my CalPERs pension should cover me pretty well in retirement, thus my current dilemma.

AA_55

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Joined: 8 Feb 2014

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Re: 529 vs maxing out 401k? Have pension as well...by Laura » Sat Feb 

08, 2014 2:46 pm

You are still a long way off from receiving that pension and much can change in the next 20 years. I would make sure you are MORE than covered on the retirement side before starting education investing. Maximizing your retirement accounts isn't the key but hitting something like 20% of gross income into your retirement accounts is. It all depends on your income. If you really do have that all covered it could be time to move into a 529 for education. I would not plan retirement withdrawals to fund education so using the 529 is a great choice.

Laura

Laura

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Re: 529 vs maxing out 401k? Have pension as well...by sunnyday » Sat 

Feb 08, 2014 3:17 pm

You could consider this: contribute to a Roth IRA and treat that as your daughters college fund. If you can contribute $5,500 ($11k if married) for the next 15 years you'll have $82,500 ($165k if married) of contributions that you can withdrawal without having to pay tax on it. Two years before before applying for financial aid, I would run an expected family contribution calculator, multiple the result by 4 years and add 5.6%, and transfer that amount from your Roth contributions into a taxable account. The reason I like this approach is that it's much more flexible if things change.

Are there any negatives to that approach?

sunnyday

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Re: 529 vs maxing out 401k? Have pension as well...by Jack FFR1846 » 

Sat Feb 08, 2014 3:21 pm

Max the 401k and IRA or Roth IRA. As the parent of a high school senior, I have been swimming in college finance for the last year. Some things to understand:

(at least with today's rules)

On you FAFSA (federal financial aid form), you do not disclose Insurance or retirement funds as assets. (401k, 403b, IRA, Roth IRA, whole life....which I do NOT recommend, by the way).

A 529 plan is considered an asset. If the plan is in your child's name, the asset is considered available to use to fund college, which means that from a "need" basis, they see it as something they expect you to pay. Kid's assets are considered at a higher rate than parents and they have no amount that is waived. From the first dollar, all of the child's assets are "available" at a 20% rate each year. So a $10,000 529 will show $2000 available and thus reduce the "need". Parents assets are treated differently. Depending on the oldest parent's age, number of kids in college and size of family, you are assessed an exempt amount of assets. Look at any FAFSA calculators to see what that is. Beyond those assets, 5.64% of your assets are available for college each year.

To hammer my original point home, if this money is instead in a 401k or IRA, there is no assumption that you will use any of that for college.

There is a caviat to this. While state colleges and a good number of private colleges ONLY use the FAFSA form for determining your "need" and EFC (expected family contribution), there are some who are what are called CSS colleges. They require additional disclosures and private colleges can do as much digging as they want.

Some more good news (sarcasm).....your income is more highly considered in what you can afford, so look at that. If you make $500k a year, you're getting nothing anyways, so put the money where you want.

Some actual good news: There are merit scholarships that colleges give students based on their high school grades and these can be for one year or can have a minimum GPA attached and go for more. My son has been accepted at his #1 choice and was given $11k a year in merit scholarship for each of his 4 years, which we are extremely happy with as we don't expect anything in need based financial aid.

A common practice is for a grandparent or other person to set up a 529 for a child. This is not owned by you or your child. At the moment, FAFSA does not ask about this. Some private colleges do as this trick is pretty well known and has been going on for a while. Rules could change and of course, if you put money into a 529 controlled by someone else, they have complete control over it, including taking the entire balance out (minus penalties) and using it to buy themselves a Porsche.

Jack FFR1846

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Re: 529 vs maxing out 401k? Have pension as well...by freddie » Sun 

Feb 09, 2014 12:28 am

The problem with this work around is that when the grandparents pay, it counts as income to the student for the following year. And students are expected to pay 50% of their income towards college. It pretty much means you only want the grandparents paying for the last year of college if you expect to get financial aid. On the other hand any money in the parents name has 5% of it allocated towards your EFC.

Jack FFR1846 wrote:A common practice is for a grandparent or other person to set up a 529 for a child. This is not owned by you or your child. At the moment, FAFSA does not ask about this. Some private colleges do as this trick is pretty well known and has been going on for a while. Rules could change and of course, if you put money into a 529 controlled by someone else, they have complete control over it, including taking the entire balance out (minus penalties) and using it to buy themselves a Porsche.

freddie

Posts: 1

Joined: 9 Feb 2014