Conversation about... Funding College Education

Let's take a look at the funding options for school for your children since the 2006 tax law change.

Recently, Congress passed a new bill that changes the rules on accounts established under the Uniform Transfers to Minors Act (UTMA). Basically, it moves the Kiddie Tax age to 18 from 14. That means that in order for gains to be taxed at the children's 5% capital gain rate, a child must be at least 18 years old. One of your children will be 18 in December but we have another three years before your second child will be 18. Until that child is 18, the gains will be taxed at your capital gain rate of 15%. 15% is not a bad rate but 5% is better.

Here is what we recommend:

For Child One - We will transfer your maximum gift amount ($24,000 less the amount you have already put in his 529 plan in 2006) in Exxon stock from your joint account into his custodial account. After he turns 18 in December, we will sell the Exxon in his name and these monies can be used to fund future tuition expenses. This will save about $2,000 in taxes compared to what you would have paid had you sold the stock personally.

For Child Two - We will transfer shares of appreciated stocks from your joint account to his custodial account. The transfer amount will be the maximum amount permitted by the gift laws. We will hold the shares until he is 18. Going ahead and getting some funds over to his name will help in future years.