The Truth Behind Those ‘College Savers’ Bonds
Q: I watched last week’s sale of the so-called college savers state bonds with great interest and am trying to sort out the reality from the hyperbole. Can you explain how these bonds are different from run-of-the-mill zero-coupon municipal bonds? Also, can you tell me who benefits the most from them? --A.R.
A: The most cynical of us might say that the largest beneficiary of the new “college savers” tax-exempt state bond sale was state Treasurer Thomas Hayes, whose staff developed the bond program concept and managed to stage the sale--the first state issue aimed at small investors--just weeks before his highly contested election bid. But, you shouldn’t just listen to the cynics; there’s more to be said about these bonds, which proved their popular appeal by selling out in a matter of days.
For all practical purposes, the college savers bonds are no different from traditional zero-coupon municipal bonds. The college savers are exempt from state and federal taxes and pay interest only upon maturity; further, they are ordinary public works revenue bonds having no direct connection to higher education.
The only difference between the college savers and zero-coupon munis is that the former were sold in small denominations: $1,000 face value rather than $5,000. This meant that the minimum investment in the college saver bonds ranged from $276.61 for a $1,000 bond maturing in 18 years to $598.29 for a $1,000 bond maturing in eight. You can roughly figure that the minimum investment would have been about five times those amounts if the bonds had been sold in $5,000 increments.
According to the state Treasurer’s Office, the lower minimum reflected Hayes’ effort to develop a product that smaller savers could take advantage of and one that could help Californians save for their children’s education.
However, despite their name, the bonds do not have to be used for college education; in fact, they have no restrictions on their use. This feature makes them far more attractive to savers than the U.S. government’s new Series EE college savings bonds, which can be used only for certain college expenses. In addition, unlike Series EE bonds, whose tax exemption is gradually phased out for families with an annual adjusted gross income of $60,000 and up, the California bond program imposes no income restrictions on buyers.
Are college savers the best means of saving for your child’s education? According to our experts, the bonds are safe, tax-free and predictable, if held to maturity. But think about it: The only advantage of college saver bonds over traditional zero-coupon munis is their low minimum price. But how far will $1,000 go toward paying for a college education or, for that matter, your retirement? There’s practically no difference between saving enough to buy a $5,000 traditional zero-coupon bond every year or so and buying five times as many college saver bonds. The choice is yours, now that you can see that what’s really new and different about college saver bonds is their packaging and marketing.
By the way, the same advice that our experts routinely offer about zero-coupon munis applies to the new bonds as well: They are best purchased only by those in the highest tax bracket, because one of their major advantages is their tax-exempt status. Finally, don’t buy them if you think you might have to sell them before they reach maturity. The value of zero-coupon bonds can fluctuate wildly in the secondary market because of interest rate changes.
Taking Legal Action Against a Tax Preparer
Q: Several years ago, I sold some income property and gave my accountant, who has served me for more than a decade, all the pertinent information about the deal. He prepared my tax return, and I paid what he said I owed. Now the state has checked my return and told me I owe extra tax, plus more than $1,500 in late charges and interest. The accountant said the additional tax was because of a change in state law that his computer service didn’t pick up. He apologized for the error. Do I have any recourse against him? --E.F.G.
A: You certainly do, including filing charges of negligence with the state regulators and suing him for malpractice.
However, for starters, you might talk to your accountant and ask him to reimburse you for any penalty the state assessed you, and--possibly--the interest you were charged to see just how responsible and apologetic he really feels. According to our experts, many accountants, upon learning that they made a tax preparation error, voluntarily offer to pay the penalty just to maintain the goodwill of their clients. Usually, however, such an offer does not extend to the interest assessed on the penalty, on the theory that the client had use of the money while the tax return was being reviewed. And accountants never pay the excess tax levied by the government because that was an obligation of the client all along.
Perhaps, if you ask your accountant to take financial responsibility for the error, you will not have to resort to filing a complaint with the California Board of Accountancy, which licenses and regulates accountants, or suing for malpractice.
State regulators say they concentrate on disciplining accountants who are found guilty of “gross negligence,” a finding that can be made based on a single large error or a series of smaller mistakes, which taken together demonstrate that the accountant is unfit. Disciplinary action ranges from revoking a license to making the accountant take a refresher course. Even if the regulators take no action on your complaint, it could form the basis for future action if other clients file similar notices alleging professional incompetence.
The California Board of Accountancy is at 2135 Butano Drive, Sacramento, Calif. 95825.
Filing suit for malpractice, the most drastic action, could prove more expensive and time-consuming than it is worth.
But that is for you to decide, based on the advice of a trusted lawyer who, one would hope, serves you better than your accountant apparently has.
