Children’s Impact Under Tax Reform

With the recent overhaul of the US tax system, it comes as no surprise that many are still trying to decipher how they are impacted by the changes. While media pundits have been quick to highlight the most dramatic changes (i.e. mortgage interest limitations, state tax deduction limits, lowered corporate taxes), few have touched on how this reform will impact individuals/families with children under 18 years old. To summarize these changes:

Enhanced Child Credit:

• Expanded from $1,000 per qualifying child to $2,000
• New $500 credit is available for qualifying dependents not eligible for the full $2,000 credit (this is intended to make up for taxpayers no longer being able to claim their dependent parents as personal exemptions).
• Most notable point for LFA clients: Credits begin to phase out once income exceeds $400k for married couples, $200k for all other taxpayers. This is an increase from the former phase-outs of $110k for married couples, $55k for all others. Many more LFA clients will qualify for this credit.

529 plans:

• 529 savings plans have been a tax-efficient way to save for future education expenses on behalf of a designated beneficiary, such as a child or grandchild. Before tax reform, these accounts were strictly reserved for college and post-secondary training. Now, up to $10,000/year may be withdrawn from these accounts to cover the costs of K-12 expenses (includes expenses for public, private, and religious schools).
• Qualified 529 expenses remain pretty much the same as they were previous to tax reform: Tuition, room and board, technology (computers/printers/laptops/software), books and supplies, certain homeschooling expenses (new).

Kiddie tax

• Prior to tax reform, the tax code allowed for parents to transfer appreciated securities to their children and for their children to sell the securities and recognize the gain (at lower rates than if the parent had exercised). Transfers of income like this are still allowed and slightly more favorable…as long as the strategy keeps capital gains, interest, and dividends below the $2,600 – 0% tax rate.
• Earned income, however is subject to higher rates at lower income levels.
• Previous kiddie tax rules stated that, at worst, the child’s income would be taxed at the parents’ tax rate. Now, children’s ordinary income and/or capital gains are taxed at the same rates as trusts, listed below:

As with all financial planning topics, feel free to contact us to discuss how new tax law changes affect you! 

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At Lighthouse Financial Advisors, we strive to educate our clients that the location of their assets is often just as important as the funds they invest in – this rule is no exception when it comes to utilizing 529 plans. While most investment companies have faced an increased pressure to reduce their fees, most 529 plans have not. Why?

1. Most states incentivize their residents to participate in 529 plans by offering a tax deduction for contributions.
2. States only offer a limited menu of 529 plans (usually 1-3 different plan options).

The combination of these two factors has resulted in parents/grandparents simply settling with one of their state’s 529 plan offerings. With the steady flow of participants to state-designated 529 plans, fund managers have had little incentive to reduce their costs.

What many folks don’t realize is that a number of states (16 to be exact, NJ is one of them!) offer no substantive benefits (i.e. tax deductions) for using their state-designated 529 plans. To add insult to injury, Morningstar has just downgraded NJ’s Franklin Templeton 529 College Savings plan (1 of the 2 plans offered by NJ) from neutral to negative. REASON: The NJ Franklin Templeton plan’s most popular option, their “Growth” age-based plan, has an average fee of 1.19% while the national average expense ratio of 529 plans is .55%. Morningstar wrote about the NJ Franklin Templeton plan, saying that “subpar oversight at the state and program manager level decrease our confidence in the plan’s long-term prospects.” NOT the most promising review…

IMPACT:
If you invested $24,000 when your child/grandchild was three years old and left the funds untouched for 15 years, an average annual return of 7% would result in the NJ Franklin Templeton plan growing to $55,990 while the “average” 529 plan would have reached $61,291. An even lower-fee 529 plan (like one offered through Vanguard*) would have grown to $63,665 over that same period.

ACTION:
– NJ Residents: Given NJ’s lack of 529 tax incentives and less-than-compelling 529 plans, we advise clients to explore their options. Great options to consider include:

• Utah (UESP 529 – https://www.uesp.org/)
• West Virginia (Smart 529 – http://www.smart529select.com)
• Vanguard 529 (No direct state affiliation – https://investor.vanguard.com/529-plan/)

– NY Residents and beyond: Single NY tax filers can reduce their taxable income by $5,000 by making a $5,000 contribution to a NY 529. This amount increases to $10k for those who are married and file jointly.

• BEWARE: While it’s great that NY (like many states) offers a tax deduction, be aware that participants have to choose between “Advisor-Guided Plans” and “Direct Plans” – always opt for the direct plans. Advisor-Guided Plans typically charge just over 5% for every 529 contribution. That is, each time you contribute money to the child’s 529 account, 5% of your contribution (no matter the size) goes directly to a financial salesperson’s pocket.

Don’t let fees drag down the precious funds you are setting aside for the next generation’s continuing education. As always, please feel free to contact our team to discuss this further

*Vanguard’s average 529 expense ratio is .28%
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The time preparing for and the first few weeks of your son or daughter heading offing to college are usually filled with excitement, planning, paperwork, shopping, and adjustments.  One often overlooked important task is asking him or her to sign a durable power of attorney and a health care proxy. This is even more important if heading for a semester or year abroad.

These estate planning documents allow you (the parent) to have the legal authority to make financial and health care decisions should your child become incapacitated while at school. The alternative is needing court approval during a stressful situation. These are incredibly powerful documents and your child should appoint someone they trust implicitly. While we’ve never had a clients’ child suffer a disabling event, the threat is real and numerous horror stories heard.

The health care proxy allows access to medical records and ability to make medical decisions on your behalf. You also have the option to include more specific language regarding organ/tissue donation.

The durable power of attorney allows you to make financial decisions on your child’s behalf, such as, transferring money from a bank account or breaking a lease. This power also provides authority to see grades since schools do not have to disclose this information without a student’s permission. If this is a touchy subject, the power of attorney can restrict a parent’s authority to bills only.

We encourage you as the parent to introduce the subject since kids are focused on roommates, packing and anything else besides this topic. Free updated versions of these documents for each State can be found at www.caringinfo.org.

As September approaches and students begin to prepare for the fall semester, we feel this is an excellent opportunity to share ways that they can be smarter with their everyday expenses.  With limited resources, college students can benefit immensely by learning to stretch their dollars. Aside from the classes they take, the independence of college gives them a place to hone their personal money management – a helpful experience that is arguably as important as the very classes they are enrolled in. Listed below are a few ways that students can be smart with all their hard earned summer wages, their loans, or your occasional allowance:

1. Avoid buying brand new textbooks.  Useful sites to find secondhand textbooks include:
   • chegg.com (Rent or buy books and eTextbooks)
   • slugbooks.com
2. Visit a local bank. Ask about checking and saving accounts offered for college students.  Some will offer a very low minimum balance requirement and having your account locally will save on ATM fees.
3. Cut out cable. If they’re staying off campus this could be a huge savings.  Sharing accounts on streaming sites like Hulu and Netflix is a great way to stay up to date on movies and television series without the egregious monthly cost of cable.
4. Buy a coffee maker.  This may seem silly, but can be a smart financial decision.  It’s amazing how fast those little expenses add up.
5. Pay all bills on time.  Have them get in the habit of paying their bills on time, every time, to avoid unnecessary late fees.
6. Use your student discount. Before they purchase an item they need, research if they offer a student discount.  Personally, I found this extremely helpful when purchasing my 1^st laptop as well as my car insurance (extra motivation for a high GPA!)
7. Leave the car at home. Paying for parking, gas, and unexpected repairs can break the bank.
8. Most important – Create a Budget.  Use your money for rent, bills and groceries first.  Then look ahead to upcoming expenses.  This will give them a reality check on how much they actually have for discretionary items.

Threats to Data Security Intensify every hour, technology continues to evolve, changing the way we lead our lives. Unfortunately, cyber criminals are evolving just as fast, developing new ways to separate people from their assets. While the most common tactics used to compromise a victim’s identity or login credentials are long-time nemeses such as malware, phishing, and social engineering, they are growing increasingly difficult to spot. The end game with these tactics is, of course, criminal. After gaining access to an investor’s personal information, cyber criminals can use it to commit various types of fraud, including:

• Fraudulent trading
• Electronic funds transfer (EFT) fraud
• Wire fraud
• Establishing fraudulent accounts

Common ways in which identity and login credentials are stolen

• Malware: Using malicious software (hence, the prefix “mal” in malware), criminals gain access to private computer systems (e.g., home computer) and gather sensitive personal information such as Social Security numbers, account numbers, passwords, and more.

How it works: While malware can be inserted into a victim’s computer by various means, it often slips in when an unwary user clicks an unfamiliar link or opens an infected email.

• Phishing: In this ruse, the criminals attempt to acquire sensitive personal information via email. Phishing is one of the most common tactics observed in the financial services industry.

How it works: Masquerading as an entity with which the victim already has a financial relationship (e.g., a bank, credit card company, brokerage company, or other financial services firm), the criminals solicit sensitive personal data from unwitting recipients.

• Social Engineering: Via social media and other electronic media, criminals gain the trust of victims over time, manipulating them into divulging confidential information.

How it works: Typically, these scammers leverage something they know about the person—like their address or phone number—to gain their confidence and get them to provide more personal information, which can be used to assist in committing fraud. Social engineering has increased dramatically, and many times fraudsters are contacting people by telephone.

Tips to protect against Cyber Fraud are outlined in the “Protection Checklist”. Investor Protection Checklist

(Article and Information supplied by Fidelity Investments)