Check Out the College Saver Plan
Q: I am interested in putting some money aside for a young member of my family. My hope is that this money will be used for his college education. What is my best investment: a traditional savings account at a bank or U.S. savings bonds? Maybe there is another, still better choice? -- N.W .
A: Of the two choices you presented--a traditional bank passbook savings account or U.S. savings bonds--the latter is clearly preferable in today’s interest rate environment. Not only are savings bonds paying higher rates, but their proceeds can be entirely tax free if your income qualifies you to take advantage of the government’s College Saver plan. (Currently, families with adjusted gross incomes of up to about $67,000 are entitled to take full advantage of the tax exemption. The tax break is gradually phased out for incomes above that level until ending completely at an adjusted gross of about $97,000.)
To be fair to banks, however, it must be noted that savings institutions are offering higher interest rates than those paid on savings bonds on larger accounts held for specified minimum periods of time. So if you have a lot of money to set aside, you could consider a higher-yielding certificate of deposit. However, interest generated by such accounts would still be entirely taxable, while savings bond interest is always exempt from state taxes and can be spared federal taxes under the College Saver plan.
That said, you may want to consider another alternative recommended by several financial advisers: the 20th Century Giftrust Investors, a highly rated fund used by many college savers. This fund allows you to open an account with as little as $250 and periodically add to it in increments of $50. The fund must be purchased as a gift trust and must be held for either 10 years or until the child reaches age 18. The fund, which invests in stocks whose value can fluctuate dramatically over short periods, has enjoyed strong growth in recent years. (For the three-year period ending Oct. 31, 1994, its average rate of return was 26.88%.) The fund does not charge an initial commission, but it does levy an annual management fee of 1%. For more information, call (800) 345-2021.
Recovering Overpaid SDI on Tax Return
Q: I held two jobs last year and realize that because of withholding, I paid more state disability insurance than I was required to. How can I get this money back when I file my tax return? -- B.B.
A: Go to Line 41 on your California Form 540 tax return labeled “excess California SDI withheld.” The number you fill in that blank is added to your other withheld taxes and either reduces the amount you owe the state in income taxes or increases the amount of refund the state owes you.
By the way, you should check to determine if excess Social Security taxes were withheld because you had two employers. If so, you can claim credit for that amount on Line 58 of your federal 1040 tax return.
Learn About Forming an Investment Club
Q: I am seriously considering forming an investment club and need to have several basic questions answered. Any help would be appreciated. -- L.F .
A: The best place to go for the information you want--and much more--is the National Assn. of Investors Corp. This organization has overseen the creation of thousands of investment clubs across the nation, virtually all of which are organized as simple general partnerships that pool members’ contributions and invest them, typically in the stock market.
Usually someone within each group is designated as the club treasurer or bookkeeper, and it is the job of this person to keep track of the club’s expenses, its trades and the dividend income generated by the investments.
To contact the association, call (810) 583-6242.
Two-State Couple Wonder About Taxes
Q: My wife has moved out of state for a new job and I have been unable to join her because I cannot find a job there. How can we file our tax returns since each spouse is a full-time resident of different states? I am specifically concerned about how we should apportion interest and dividend income, dependent exemptions and other deductions if we file separate returns. -- A.H.S .
A: You should file separate returns, each as a married person, in your respective states. (To be strictly kosher, your wife should file a non-resident California state tax return, as well.) Your federal return can be similarly handled--married but filing separately. The mortgage interest deductions should be claimed by the spouse paying them, and any income from real property should be reported by the appropriate spouse in the state where that property is located.
Assuming that your other interest and dividend income is from community-held property, you can split the reporting responsibilities 50-50. If the investments are held separately by one spouse, it is his or her responsibility to declare any income or loss generated by that.
