Studying Ways to Save for College
Q. We are in our early 30s and have an infant son. We want to start a college fund for him with $1,500 we have saved. What is the best way to proceed? We hope to be able to add to the fund periodically.--C.L.
A. Your most conservative choice would be to purchase U.S. Savings Bonds under the College Saver plan. They are absolutely safe, require no commission fees and can be regularly purchased in small denominations. Further, as you may know, middle- and lower-income taxpayers who use Savings Bonds for their children’s college education don’t have to pay federal income tax on the bond proceeds. (Savings Bonds have traditionally been exempt from state taxes as well.)
Not everyone, however, qualifies for the plan. Eligibility depends on the income of the family at the time the bonds are redeemed. Currently, taxpayers filing individual returns are entitled to a full federal tax break on the bond proceeds if their adjusted gross income is less than about $45,000. The tax break is gradually phased out as the individual’s income approaches a maximum of about $60,000. Couples filing joint returns must have an adjusted gross income of less than about $67,000 to take full advantage of the federal tax break. Partial tax breaks are available for couples with adjusted gross incomes up to a maximum of about $97,000. These income limits are adjusted annually by a cost-of-living index and will certainly be higher by the time your son is ready to enter college.
A more aggressive choice is offered by Margi Mullen, a Los Angeles financial planner and portfolio manager, who recommends investing in a mutual fund specifically aimed at long-term growth. She suggests investigating 20th Century Giftrust Investors, a highly rated fund used by many college savers. You can open an account with as little as $250 and periodically add to it at will. However, the fund must be purchased as a gift trust and must be held for either 10 years or until the child reaches adulthood. The fund, which invests in stocks and whose value can fluctuate dramatically over short periods, has enjoyed strong growth in recent years. It does not charge an initial commission, but it does levy a management fee of 1% a year. For more information, call (800) 345-2021.
Intrigued by Streisand’s Coastal Estate Donation
Q. I am intrigued with Barbra Streisand’s plan to donate her coastal estate to the state and am wondering if such an offer can be advantageous to mere mortal taxpayers stuck with a house they can’t sell or are in danger of losing to foreclosure. What kind of a write-off can you get by donating your house to a charity?-- M.P .
A. First of all, for a contribution to be deductible, it must be made to a registered charity. Further, any charitable deduction of goods worth more than $5,000 must be verified by a signed independent appraisal that is submitted with your tax return.
Now then, how would such a gift work? It depends, of course, on the donor’s tax bracket and whether the property is owned free and clear or is subject to a mortgage.
If the property is unencumbered by mortgage, the computation is simple. The net effect of the deduction is determined only by the donor’s tax bracket. A donation of a $10,000 property from a donor in the 38% combined tax bracket (31% federal and 7% state) yields $3,800 in tax relief.
However, if the property carries a mortgage, the amount of the donated mortgage is considered a cash payment to the donor and substantially reduces--or even eliminates--the deduction.
Let’s say the $10,000 property carries a $5,000 mortgage and a $5,000 tax basis. (The tax basis is the baseline number used to calculate a capital gain.) The donor, explains Palm Springs accountant Howard Gordon, would net a deduction of only $2,500. To a donor in the combined 38% tax bracket, the net effect of the write-off is $950 in tax relief.
Deducting Computer Costs: Is It Worth It?
Q. I work for a software development company. I bought a home computer that I use a lot for work-related business. May I deduct some of the cost of the computer, its accessories and supplies?-- C.K .
A. You can, but once you understand the IRS’ strict ground rules and severe limitations, you may decide it’s not worth the effort. To be eligible for a deduction, your home computer must be used more than half the time for business-related activities. Let’s say you use the computer, its accessories and all supplies 60% of the time for business-related work. You would then be eligible to deduct up to 60% of your charges--subject to constraints.
For starters, your equipment must be amortized over five years. This means you would first divide the cost of your computer, printer and other devices by five, then multiply that number by 0.6. (Supplies do not have to be amortized, but you may deduct only 60% of these costs in any given year.) After you have made these computations, you are entitled to deduct only that amount that exceeds 2% of your adjusted gross income. Do you still have a deduction?
Say your computer equipment cost $5,000, an amount that should get you a pretty nifty home office setup. By our reckoning, you could allocate $600 of that amount to business-related activities per year for five years. Let’s say you spend $200 a year on supplies, giving you a $120 annual charge for business-related supplies. Your total potential deduction is $720. Now let’s say you have an adjusted gross income of $70,000, 2% of which equals $1,400. The bottom line: You don’t have a deduction. Not even close.
The lesson here is that unless your income is quite low or your computer equipment is very expensive, you are not likely to have a legal deduction. Further, even if you do have a deduction, you may decide it’s not worth taking, because they are known to raise a red flag to the IRS.
