“College Funding: Avoiding the Kiddie Tax”

Reader Question:  Our daughter who turned 19 in January will start her sophomore year of college in August. Last year we used $5,000 from HER mutual fund and were hit with a $1,000 tax bill. We want to avoid that this year, can you give us advice on the best way to pay college expenses using her mutual fund please?  D.T.

Answer:  Unfortunately, you are running into something called a Kiddie Tax.  The Kiddie Tax is a tax rule that is applied to interest, dividends and capital gains earned on investments owned by children under the age of 19 and college students under the age of 24.  For 2017, the first $1,050 of investment income a child or college student earns will be offset by the $1,050 standard deduction (assuming the child has no other earned income), and the next $1,050 of such investment income will be taxed at the child’s tax rate. All of the child’s investment income in excess of $2,100 is taxed at your tax rate (i.e. the parent’s tax rate).  Knowing this rule can help you decide if selling the mutual fund is the best option or consider funding from another source such as savings or even borrowing short-term from sources such as a home equity line of credit (HELOC).  Your child can always “pay you back” after they get beyond the Kiddie Tax age.  Once beyond the Kiddie Tax age, the capital gains tax is 0% for single filers up to the 15% tax bracket which is $37,650 of taxable income.

Reader QuestionAs you know, Social Security recipients will be receiving COLA increases beginning January 1.  Between us, my husband and I will be receiving a whopping total of $9.00 (yes, that’s nine) more a month. We are currently confused, as we are trying to decide how best to handle this windfall. My husband can’t decide; I feel saving it is the most prudent thing to do (maybe an IRA), but friends think we should just blow it on a dinner at McDonald’s every month. We would like a professional opinion as to what we should do with this good fortune.  Mrs. H.

Answer:  This is a great opportunity to take a grandchild to McDonald’s once a month, although you might have to supplement it with a few dollars from savings!  And yes, Mrs. H., I know you were kidding.  On a serious note, if President Trump implements the plans he’s outlined, I expect the economy to begin to heat up and along with that, inflation.  So, while it’s been a long dry spell for Social Security cost-of-living increases, I think that’s about to change.

Reader Question:  My wife and I have IRAs. We send enough from my IRA to satisfy both Required Minimum Distribution (RMD) dollar requirements. Does this cover the requirement?  J.V.

Answer:  No. You must take a Required Minimum Distribution (RMD) from each person’s account in this case. It’s worth noting that if you own multiple IRAs in your name, you are allowed to aggregate the distributions under certain circumstances, but the law does not allow one spouse to pay the RMD for the other spouse.

Reader Question:  I’m age 65.  Do I have to pay real estate taxes?  A.A.

Answer:  For the Alabama portion of your home’s property tax (homestead), you can receive a full exemption.  To do so check with your local county clerk for the process they require.

If you’d like to have me answer your financial question email me at stewart@welchgroup.com and place AL.com in the subject line.  Consult your own professional legal, tax or financial advisor before acting upon this advice.