Helping Fund a Grandchild’s Education
QUESTION: I understand that the government is starting a program allowing proceeds from Series EE savings bonds purchased after Dec. 31, 1989, and used for a child’s college education to be considered tax free. I want to purchase some of these bonds for my grandchildren, who are ages 10 and 13. Their parents now earn less than $35,000 annually. Where may I purchase these bonds and where may I obtain a pamphlet describing all the provisions of this new law?--P. S.
ANSWER: What a terrific and generous idea you have. Unfortunately, the tax breaks for Series EE bonds used for higher education and vocational training are allowed only for the parents and legal guardians of the children for whom the bonds are purchased.
All the rules and regulations for the new program have not yet been published, and officials at the Federal Reserve Bank say they do not expect any pamphlets to be ready for public release at least until October or November.
Still, let’s review what we do know about the program and what you might do to participate in it, at least indirectly.
Beginning in 1990, interest earned on Series EE bonds issued after Dec. 31, 1989, can be free from federal taxation if they are redeemed to pay for college or vocational school.
However, as you might expect, there are several restrictions. Bond buyers must be at least 24 years old and the tax break will apply only to bond proceeds used for tuition and required school fees--not books or room and board. In addition, it will apply only to degree programs at colleges, universities and certain vocational schools.
Also, the tax break can be used only by families and individuals meeting certain income standards. For couples filing jointly, the cutoff is an adjusted gross income of $90,000; for individual filers, it’s $55,000. Finally, as we said earlier, these breaks are intended only for the parents of the children attending college.
But, if you want to help finance your grandchildren’s college education, there would be nothing stopping you from making a tax-free gift to your son or daughter and letting them use that money to purchase Series EE bonds next year. As you may know, any individual can give any other individual $10,000 tax free each year. By making a gift to your children for their purchase of the bonds, you will have accomplished your goal and adhered to the government’s regulations.
Collecting Early on Social Security
Q: I read your recent column about taking Social Security benefits at age 62, rather than 65, and accepting a 20% lower payment in exchange for the earlier payout. But will the 20% penalty carry over if my husband dies and I begin collecting widow’s benefits on his account?--M. R.
A: No. According to a spokesman for the Social Security Administration, if you are at least age 65 when your husband dies, you are automatically eligible to collect full widow’s benefits, regardless of the fact that you had taken early Social Security benefits under your own account at age 62.
If a widow is under age 65 when she enrolls for widow’s benefits, those payments will be reduced to compensate for the early enrollment. The exact amount of the reduction is determined at the time the payment schedule is set.
Pension Plans and IRA Deductions
Q: When the tax deduction for individual retirement account contributions was eliminated for couples making more than $50,000 per year, my husband and I stopped taking this deduction. However, our new accountant now tells us that we can deduct our contributions because our W-2 forms indicate that no contributions were made to pension plans on our behalf. My husband’s employer does not offer a pension. The company I work for offers a pension, but I have not worked there long enough to be vested in the plan. Can you clear up our confusion?--B. T.
A: We’ll try. The test the government applies when it decides who can make a tax-deductible IRA contribution is whether the taxpayer is eligible to “participate” in a qualified pension plan.
What does that mean? Our experts tells us if your company offers a pension plan and you are enrolled in it or eligible to enroll in it, you are deemed to be participating in the plan. Whether you are fully vested in the pension plan, which can take up to five years or more, is irrelevant to the issue. If your company is making contributions to the plan on your behalf--even if you cannot retrieve them if you quit--you are not eligible to make a tax-deferred IRA contribution.
You should check with the plan administrator at your employer--you can start by asking the employee benefits department for assistance--to learn the exact rules for participation in your company’s pension plan.
Splitting Up: Who Gets the Tax Exclusion?
Q: My husband and I are both over age 55. We filed for divorce in March and sold our home in April. May we file tax returns for 1989 and each take a $62,500 exclusion on the sale, or do we have to file jointly to take advantage of the $125,000 exclusion? Or are we each entitled to take the $125,000 exclusion since we filed for divorce before escrow closed on the house sale?--J. A. O.
A: The degree to which you may take advantage of the $125,000 tax exclusion in your case depends on only one issue: your marital status at the time you sold your house.
Since you are both age 55, you are entitled to claim the exemption, assuming you lived in the house at least three of the last five years. But because you sold the house when you were still married--filing for divorce is not the same as actually being granted one--you are eligible only to share a $125,000 exemption with your husband, not take the full $125,000 exemption for each of you.
Our advisers say you may either take a $62,500 exemption and file a tax return as an individual, or you may share the full $125,000 exemption on a joint return with your husband. The government doesn’t care.
If you had waited to sell the house until your divorce was granted, you and your husband would have each been entitled to claim the full $125,000 exemption.