The 2009 Kiddie Tax May Affect a Student's College Savings
However, for students utilizing a state-sponsored 529 plan, the 2009 Kiddie Tax
may not affect savings.
(Princeton, NJ- February 19, 2009) - Although there are not many
ways around it, the 2009 kiddie tax can be manageable for parents with college-bound
kids. Best of all, those with a 529 plan or Coverdell Education Savings Account may not
be affected at all.
Joe Hurley of Savingforcollege.com explains ways to understand the kiddie tax,
because the harsh reality is that many families will have to pay this extra cash to the
government.
The kiddie tax states dependent children who have unearned income (dividends,
interest and capital gains) in excess of $1,900 will be taxed at the parent's
marginal tax rate. This means full-time college students under the age of 24 may be
subject to the tax. There is an exception for college students at least 19 years old,
and for 18-year olds who are not yet in college, who can show that their earned income
for the year exceeds one-half of their total support.
This change in the kiddie tax rules makes using a 529 plan to save for higher
education more attractive than ever because the earnings are distributed tax-free when
used to pay for college. This is one way to avoid the tax altogether.
Until recently, the kiddie tax only applied to children under the age of 14, but in
2005 it was expanded to cover those persons age 18 and under. It was expanded again to
also cover full-time college students under the age of 24.
If a student does not report over $1,900 in unearned income in 2009, they will not
be subject to this tax. However, for students who have taxable investments in their own
names or in UTMA/UGMA accounts, the tax could have an effect if those investments are
used to pay the college bills. Children who have 529 plans in their own names will
still enjoy the tax-free benefits and will not be affected by the kiddie tax.
Forbes.com recommends investing in tax-deferred 529 college savings plan or
Coverdell Education Savings Accounts as a way for future college students to avoid the
kiddie tax altogether. In addition, they recommend a future college student limit their
taxable unearned income until they are older so they won't have to pay the kiddie
tax.
In order to find out if your currently enrolled college student over the age of 18
will be subject to the kiddie tax, Hurley suggests calculating your child's total
support, then cutting that number in half, and comparing the resulting figure to your
child's gross wages and self-employment income. If earned income is higher than
one-half of total support, the kiddie tax should not affect you or your child for at
least this year.
Tallying up a student's total support can be time consuming, as you will need to
look over IRS Publication 501 and its accompanying 26-line worksheet that is used to
determine total support for dependency purposes.
The best way to avoid the kiddie tax may be to utilize a state-sponsored 529 plan.
For example savings with a 529 plan from College Savings Bank may not be affected,
since the earnings are distributed tax-free when used to pay for qualified college
expenses.
College Savings Bank offers safe and dependable tools to save for college. The
CollegeSure CD and the InvestorSure CD, as well as a series of fixed rate CDs were
created with the college saver in mind and all include FDIC insurance up to at least
*$250,000 per depositor. Fixed Rate CDs are offered in a state 529 program or open to
any investor looking for a reliable CD and are offered with 1- and 3-year
maturities.
College Savings Bank has been helping families save for college for over 20 years
with products that concentrate on safety. To find out more about our long standing
CollegeSure CD, the InvestorSure CD or our fixed rate CDs, please call College Savings
Bank at 1-800-888-2723 or visit our web site, http://www.collegesavings.com.
*On October 3, 2008, FDIC deposit insurance temporarily increased from $100,000 to
$250,000 per depositor through December 31, 2009. Member FDIC. Before investing in any
529 plan, you should consider the benefits of your home state's 529 plan. It may
provide taxpayers with state tax and other benefits that are only available through
your home state's 529 plan. You should also consult your financial, tax, or other
advisor to learn how state-based benefits (or limitations) would apply to your specific
circumstances. You also may wish to contact your home state's 529 plan[s], or any other
529 college savings plan, to learn more about those plans' features, benefits and
limitations. Keep in mind that state-based benefits should be one of many appropriately
weighted factors to be considered when making an investment decision. Early withdrawal
tax penalties apply and non-qualified withdrawals are taxable. The College Savings Bank
529 Plan is not insured by the State of Montana or the State of Arizona. Neither the
principal invested nor the investment return is guaranteed by the State of Montana or
the State of Arizona. © 2009 College Savings Bank. All rights reserved. InvestorSure is
a registered service mark of College Savings Bank. S&P 500 is a registered
trademark, used with permission, of The McGraw-Hill Companies, Inc. Read the
InvestorSure 529 Plan Disclosure Statement carefully before you invest or send any
money. This material is not intended to be used, nor can it be used by any taxpayer,
for the purpose of avoiding U.S. federal, state, or local tax penalties. This material
is written to support the promotion or marketing of the transaction(s) or matter(s)
addressed by this material. College Savings Bank and its affiliates and respective
representatives do not provide tax, accounting, or legal advice. Any taxpayer should
seek advice based on the taxpayer's particular circumstances from an independent tax
advisor.
About College Savings Bank
Founded in 1987, College Savings Bank is a member of the Federal Deposit Insurance
Corporation (FDIC), and the first savings bank chartered by New Jersey since 1893. The
Bank assists families across the country by offering safe and effective financial
products to help meet the rising costs of postsecondary education. Meeting the actual
cost of a college education is dependent upon the amounts deposited and the time
periods for which deposits are held, among other factors. College Savings Bank is the
exclusive provider of the CollegeSure CD and InvestorSure CD, innovative, unique,
saving-for-college investments. Deposits are FDIC insured up to $250,000 per depositor.
College Savings Bank is a program manager to the Montana and Arizona qualified tuition
programs. For residents of states other than Montana and Arizona, their state may offer
state income tax benefits not available through the Montana or Arizona 529 Plans,
respectively. Early withdrawal penalties apply. Please see the product Terms and
Conditions for complete details. College Savings Bank can be reached online at
www.collegesavings.com or by calling 800-888-2723.