Posts
Tuesday, November 24, 2009
Monday, November 23, 2009
"Inaccurate Claims For The College Tax Credit"
From our friends at NICCP - National Institute of Certified College Planners
According to a government report more than 314,000 taxpayers made inaccurate claims for a popular tax credit that helps pay college expenses, getting $532 million they weren't entitled to receive.
The Hope Credit provides up to $1,650 a year to help pay expenses for the first two years of college. The taxpayers claimed the credit for the same student three consecutive years, instead of the two years available, said a report by the Treasury inspector general for tax administration. Auditors reviewed two three-year periods, ending in
2006 and 2007. About 58,000 claimed the credit a fourth consecutive year in 2007. The inspector general's report does not list names of taxpayers.
The report said the Internal Revenue Service needs better tools to detect and fix inaccurate claims, and the IRS agreed. The problem should ease since Congress has expanded the credit to four years of college, for those claiming the credit in 2009 and 2010.
"The Hope Credit is intended to help taxpayers pay for the ever increasing cost of higher education," said J. Russell George, the Treasury inspector general for tax administration. "It is imperative that the IRS works with the Treasury Department and Congress to obtain the tools it needs to effectively administer this important credit."
The report recommended that Congress authorize the IRS to fix tax returns that incorrectly claim the credit, much in the same way the agency fixes routine math errors. It also recommended new reporting requirements to help the IRS match expenses claimed by students with those reported by schools.
"We agree with your findings and believe improvements are needed to ensure eligible students receive the benefits they deserve and taxpayers claiming inappropriate credits are denied those benefits,"
Richard Byrd Jr., commissioner of the IRS wage and investment division, wrote in a response to the report.
The college tax credit was expanded for 2009 and 2010 as part of the economic stimulus package enacted in February. For those years, taxpayers can get up to $2,500 to help pay for up to four years of college for each student.
According to a government report more than 314,000 taxpayers made inaccurate claims for a popular tax credit that helps pay college expenses, getting $532 million they weren't entitled to receive.
The Hope Credit provides up to $1,650 a year to help pay expenses for the first two years of college. The taxpayers claimed the credit for the same student three consecutive years, instead of the two years available, said a report by the Treasury inspector general for tax administration. Auditors reviewed two three-year periods, ending in
2006 and 2007. About 58,000 claimed the credit a fourth consecutive year in 2007. The inspector general's report does not list names of taxpayers.
The report said the Internal Revenue Service needs better tools to detect and fix inaccurate claims, and the IRS agreed. The problem should ease since Congress has expanded the credit to four years of college, for those claiming the credit in 2009 and 2010.
"The Hope Credit is intended to help taxpayers pay for the ever increasing cost of higher education," said J. Russell George, the Treasury inspector general for tax administration. "It is imperative that the IRS works with the Treasury Department and Congress to obtain the tools it needs to effectively administer this important credit."
The report recommended that Congress authorize the IRS to fix tax returns that incorrectly claim the credit, much in the same way the agency fixes routine math errors. It also recommended new reporting requirements to help the IRS match expenses claimed by students with those reported by schools.
"We agree with your findings and believe improvements are needed to ensure eligible students receive the benefits they deserve and taxpayers claiming inappropriate credits are denied those benefits,"
Richard Byrd Jr., commissioner of the IRS wage and investment division, wrote in a response to the report.
The college tax credit was expanded for 2009 and 2010 as part of the economic stimulus package enacted in February. For those years, taxpayers can get up to $2,500 to help pay for up to four years of college for each student.
Sunday, November 22, 2009
The College/Retirement Dilemma
Four times a year I conduct educational seminars for retirees to help attract new business to my financial advisory practice. I've been doing this consistently for the last four years and in addition to providing a nice lunch, we extend an offer for the retiree and their spouse to come to our office for a one-hour complementary meeting to brainstorm their portfolio and to determine if there is any way that we might be able to help them.
We were not sure how the recent financial crisis would affect the turnout for our events or the likelihood of these retirees to take action; but on the whole there is one word that comes to mind to describe their frame of mind concerning their investments and their retirement: shell shocked!
Many of these investors have been with large brokerage houses that might have been bought or sold during the recent and ongoing banking crisis, or large mutual fund companies that provide limited advice. Invariably they have been told the same story, not to worry about their investment values going down, “You haven't lost anything until you sell” and "Don't worry the markets will come back, they always do."
Many of these folks who are anywhere from their early 60s to about 80 years old, ignored their brokers advice and sold out of the stock market some time in the last few months. You could say they panicked. These are retirees with portfolios of anywhere from about $250,000 to several million dollars.
I have met with many of these prospective clients who have lost up to 50% of their retirement account values from the market decline in 2008. What their former advisers and brokers had neglected to address head on was what financial planners call longevity risk. These people do not have the time to wait for the market to come back. In my opinion it is much more important to make the retirees’ time horizon (i.e. their life expectancy) a centerpiece of the plan rather than total return. To most retirees, making sure money will last is a far greater concern than making double-digit rates of return.
College Action Strategies For The Financial Crisis
College investors and savers have a similar situation when it comes to time horizons. How is a family to crack the college nut when the cost of college is still increasing 10% per year and college savings have lost as much as 40% of their value or more? This is a really good question and more than anything else the answer depends on each family’s unique situation and in particular their college time horizon. Three different college time horizons, the amount of time before college starts, might require three different strategies:
• If your child is a freshman in high school or younger; you have a time horizon of more than four years.
• If your child is a junior or senior and you're going to be starting the process of applying to college soon; your time horizon is less than four years.
• If your student is currently enrolled in college there are still strategies that you can begin now.
Check Your Time Horizon
If families have children who are more than a year or two away from entering college, they should carefully compare their concern for investment growth in their college savings accounts with their actual cash flow need for funds. For example, if the portfolio is invested for maximum growth (mostly in equities or stock market related vehicles), the family should reconsider a more conservative portfolio with alternatives that have fixed or guaranteed rates of return. This is particularly true the closer you get to the first college year.
Generally speaking it is prudent to have allocations that are more conservative (holding fewer equities) as you near the time the portfolio distributions are needed, which would likely be the first semester of college.
With the stock market down 35% or more, it makes sense to meet with your investment advisor to make sure your strategy is consistent with your cash flow needs for college. Incredibly over the last three years the cost to attend Virginia public colleges and universities has increased by 10% each year. Add to that another 10% increase projected for the 2009-2010 school year and you have a whopping increase of 46% over a four year period!
For families who are still in saving mode with more than three or four years away from college, I highly recommend increasing college savings contributions (if at all possible) as well as applying the principles found in my book to lower college costs. Ideally, families need to lower savings risk, improve the chances of their money growing at reasonable rates attuned to their time horizons, while simultaneously reducing the cost of college.
We were not sure how the recent financial crisis would affect the turnout for our events or the likelihood of these retirees to take action; but on the whole there is one word that comes to mind to describe their frame of mind concerning their investments and their retirement: shell shocked!
Many of these investors have been with large brokerage houses that might have been bought or sold during the recent and ongoing banking crisis, or large mutual fund companies that provide limited advice. Invariably they have been told the same story, not to worry about their investment values going down, “You haven't lost anything until you sell” and "Don't worry the markets will come back, they always do."
Many of these folks who are anywhere from their early 60s to about 80 years old, ignored their brokers advice and sold out of the stock market some time in the last few months. You could say they panicked. These are retirees with portfolios of anywhere from about $250,000 to several million dollars.
I have met with many of these prospective clients who have lost up to 50% of their retirement account values from the market decline in 2008. What their former advisers and brokers had neglected to address head on was what financial planners call longevity risk. These people do not have the time to wait for the market to come back. In my opinion it is much more important to make the retirees’ time horizon (i.e. their life expectancy) a centerpiece of the plan rather than total return. To most retirees, making sure money will last is a far greater concern than making double-digit rates of return.
College Action Strategies For The Financial Crisis
College investors and savers have a similar situation when it comes to time horizons. How is a family to crack the college nut when the cost of college is still increasing 10% per year and college savings have lost as much as 40% of their value or more? This is a really good question and more than anything else the answer depends on each family’s unique situation and in particular their college time horizon. Three different college time horizons, the amount of time before college starts, might require three different strategies:
• If your child is a freshman in high school or younger; you have a time horizon of more than four years.
• If your child is a junior or senior and you're going to be starting the process of applying to college soon; your time horizon is less than four years.
• If your student is currently enrolled in college there are still strategies that you can begin now.
Check Your Time Horizon
If families have children who are more than a year or two away from entering college, they should carefully compare their concern for investment growth in their college savings accounts with their actual cash flow need for funds. For example, if the portfolio is invested for maximum growth (mostly in equities or stock market related vehicles), the family should reconsider a more conservative portfolio with alternatives that have fixed or guaranteed rates of return. This is particularly true the closer you get to the first college year.
Generally speaking it is prudent to have allocations that are more conservative (holding fewer equities) as you near the time the portfolio distributions are needed, which would likely be the first semester of college.
With the stock market down 35% or more, it makes sense to meet with your investment advisor to make sure your strategy is consistent with your cash flow needs for college. Incredibly over the last three years the cost to attend Virginia public colleges and universities has increased by 10% each year. Add to that another 10% increase projected for the 2009-2010 school year and you have a whopping increase of 46% over a four year period!
For families who are still in saving mode with more than three or four years away from college, I highly recommend increasing college savings contributions (if at all possible) as well as applying the principles found in my book to lower college costs. Ideally, families need to lower savings risk, improve the chances of their money growing at reasonable rates attuned to their time horizons, while simultaneously reducing the cost of college.
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