Tax Project

In: Business and Management

Submitted By jenchen
Words 2342
Pages 10
RECOMMENDATION FOR SAVING FOR CHILDREN’S EDUCATION
Facts: Facts: Taxpayers are married and have three children, ages 9, 7 & 3. Their joint income is currently $200,000 per year.
Assumptions: Taxpayers will not have more children and they will not divorce. Their income is $200,000 per year and stays constant. They currently live in California and their children will attend college, specially the UC System, at age 18. So there are 9, 11 and 15 years until the children will need the funds. Due to the parents’ high income, the children will not be eligible for any financial aid. Based on additional assumptions that the tuition inflation rate is 8.3% and the current tuition amount for the UC system is $13,200, Table I shows the tuition amounts needed for each child.
Table I: Tuition Amounts Need for Each Child for Each Year of College | 1st | 2nd | 3rd | 4th | Total | 3year old | $ 43,651.7 | $ 47,274.7 | $ 51,198.6 | $ 55,448.0 | $ 197,573 | 7 year old | $ 31,731.2 | $ 34,364.9 | $ 37,217.2 | $ 40,306.2 | $ 143,620 | 9 year old | $ 27,053.9 | $ 29,299.4 | $ 31,731.2 | $ 34,364.9 | $ 122,449.5 | Total | | | | | $ 463,642.5 |

Issue: Based on Table I, it would be difficult to save for the children’s education based on the taxpayer’ income. We do not attempt to maximize the value of our investments due to market risk for different investments. Therefore, the overall goal is to maximize tax savings. Our five two choices are: Custodian Accounts under the Uniform Gift to Minors Act and Section 529 plans.
Conclusion: Section 529 plans is the best choice because it provide the best tax advantages.
Reasoning: Section 529 Plans provide unsurpassed tax advantages. It is the best option because it is the only one, in which income from investments is not subject to income tax if used for…...

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