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June 2008 Newsletter

June 2008 Newsletter

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Tapping Retirement Savings for College Expenses
Should you tap your retirement funds to helppay your child's college expenses? Well, youcan. But is it a good idea?
 The double problem with double dipping
Financial profes-sionals generallyrecommend usingyour retirementfunds for onepurpose only--retirement. Why?Because frequent dips into your retirementfunds will reduce your ultimate nest egg. Plus,there will be less money available to take ad-vantage of the twin benefits of tax deferral andany compounding earnings. Depleting your retirement funds too soon can create a diresituation. Remember, there is financial aidavailable to help pay for college, but none for retirement.
But, if you must...
If you absolutely must dip into your IRA to paycollege costs, there is a bit of good news.Generally, if you withdraw money from a Rothor traditional IRA before age 59½, you'll owe a10% premature distribution penalty tax on theearnings portion of the withdrawal. However,there is an exception to this penalty if themoney is used to pay the qualified educationexpenses for you, your spouse, your children,or your grandchildren. That's the good news.The bad news is that you'll owe income tax onthe earnings portion of your IRA withdrawal.But fortunately, for Roth IRAs, there is a taxordering for distributions--contributions comeout before earnings. This is important be-cause contributions to a Roth IRA are madewith after-tax dollars and can be withdrawnincome tax free at any time (even before age59½) and for any purpose. You'll only oweincome tax if you dip into the earnings. (Onceyou reach age 59½ and have held your RothIRA for five years, even earnings are incometax free.)
What about your 401(k)?
Generally, tapping your 401(k) is even worsethan tapping your IRA, because 401(k) plansdon't offer a college exception to the 10%penalty tax. Plus, you'll generally pay incometax on the entire amount of your withdrawal.So all other things being equal, withdrawingfrom your IRA is the better choice.However, you might be able to borrow fromyour 401(k) account--something you can't dowith an IRA. Assuming your plan allows planloans, loans are not taxed or penalized, aslong as you repay the funds within a specifiedperiod of time. But make sure to compare thecost of borrowing from your 401(k) accountwith other financing options. Although interestrates on plan loans may be favorable, theamount you can borrow is limited, and yougenerally must repay the loan within five years(some plans require that you repay the loanimmediately if you lose your job).
The financial aid factor 
Assets in retirement accounts aren't countedat all by the federal government's financial aidformula. So they don't affect your child's eligi-bility for federal financial aid. However, distri-butions are counted; specifically, all withdraw-als from retirement accounts--principal andearnings--are counted as parental income andassessed at rates as high as 50%.
Alternatives
Before you dip into your IRA or 401(k) accountto pay college expenses, make sure to investi-gate the cost of private borrowing, as well asany federal, state, or college-based financialaid loan programs that might be available. For example, under the federal PLUS loan pro-gram, you can borrow up to the full cost of your child's education (minus any financial aidreceived) if you have a good credit history.Similarly, your state's higher education author-ity might have a financing arm that offers fa-vorable loan terms for college.
gvandyke@synergyfinancialgrp.comwww.synergyfinancialgrp.com
Synergy Financial Group
George Van DykeFinancial Consultant401 Washington Ave Suite703Towson, MD 21204410-825-3200410-530-2500 (cell)
The end of May meansmany things - thebeginning of thetraditional vacationseason, the end ofanother school year, theconclusion of spring andwelcoming of summer.As the saying goes, "theonly constant ischange." Whether youare dealing withpersonal or professionalchange, or just watchingthe volatility of themarkets and the price ofa gallon of gas, beingprepared for change iswhat often makesdifference betweenconfidence and fear.
June 2008
In this issue: 
Tapping Retirement Savingsfor College ExpensesHave You Received YourStimulus Rebate PaymentYet?Tax-Wise Gifting Strategies forSeniorsAsk the Experts
 
Have You Received Your Stimulus Rebate Payment Yet?
 
In early May, the Treasury Department beganthe process of issuing rebate payments toover 130 million individuals--the result of pro-visions included in the Economic Stimulus Actof 2008, which was signed into law inFebruary.
Who qualifies?
If you have a valid Social Security number,filed a 2007 federal income tax return, andhad $3,000 or more of income, you probablyqualify for a stimulus rebate. The rebate canbe up to $600 per individual (up to $1,200 inthe case of a married couple filing a joint fed-eral income tax return). You may also be enti-tled to an additional $300 for each qualifyingchild you have under age 17.If your adjusted gross income (AGI) exceeds$75,000 ($150,000 if you file a joint return withyour spouse), the amount of your rebate pay-ment will be reduced, or eliminated altogether.If you're not sure how much you're entitled to,or if you've received a rebate that was lessthan you thought it should be, check out theEconomic Stimulus Payment Calculator on theIRS website, www.irs.gov.
When will I get my rebate?
If you're entitled to a rebate, and filed your 2007 federal income tax return on time, theIRS will take it from there. If you had your 2007 federal income tax refund directly de-posited into a bank account, your rebate pay-ment will be directly deposited as well. (If youweren't due a refund, but filled out the directdeposit information anyway, your rebate pay-ment will be directly deposited.) Otherwise, apaper check will be mailed to you.The IRS has released a schedule for rebatepayments for returns that were filed and proc-essed by April 15, 2008. When you get your payment depends upon the last two digits of your Social Security number (on a joint return,it's the Social Security number of the primaryfiler--the individual who is listed first--thatcounts). Direct deposit rebate payments willbe issued before paper checks.
What if I haven't yet filed my 2007 federalincome tax return?
The announced schedules apply only to indi-viduals with tax returns filed and processed byApril 15, 2008. This is true even if you filed for an extension. In any case, to get a stimulusrebate payment this year, you'll need to fileyour return no later than October 15. After thatdate, the IRS will not commit to issuing rebatepayments by the end of the year, and theTreasury Department has announced that nopayments will be issued after December 31,2008. So, if you don't file by October 15, you'llhave to wait to claim the stimulus credit onyour 2008 federal income tax return.
What if I'm not required to file a federalincome tax return?
Many individuals who are not actually requiredto file a 2007 federal income tax return shoulddo so anyway to claim their rebate payment. If you have at least $3,000 of qualifying income(qualifying income includes wages, net self-employment income, Social Security benefits,Tier 1 Railroad Retirement benefits, VA dis-ability and survivor benefits, and combat pay),you may be eligible for a rebate payment of $300 ($600 for married individuals filing jointreturns) even though you would owe no taxesand aren't required to file a federal income taxreturn. Again, if you're not sure, check the IRScalculator.
How will the rebate affect my 2008 taxes?
Your stimulus rebate payment is actually theprepayment of a 2008 tax credit. When youfile your 2008 federal income tax return in2009, you will reconcile the amount of thecredit that you're entitled to--using 2008 fig-ures--with any rebate payment that you'vealready received. If it turns out that you'reactually entitled to a larger credit based onyour 2008 tax return, you'll get the differenceas a tax credit on your 2008 return. But, if itturns out that you should have received lessthan the amount that you received as a re-bate, you don't have to pay back thedifference.
Where can I get more information?
The IRS has consolidated all announcementsand has posted an incredible amount of help-ful information on a new "stimulus payment"section of its website, www.irs.gov.Of course, a tax or financial professional canalso help you with any questions you mayhave.
Last twoSSN digitsPaymentscheduled
00 - 20 May 221 - 75 May 976 - 99 May 16
Direct DepositLast twoSSN digitsPaymentscheduled
00 - 09 May 1610 - 18 May 2319 - 25 May 3026 - 38 June 639 - 51 June 1352 - 63 June 2064 - 75 June 2776 - 87 July 488 - 99 July 11
Paper Check
Schedules for StimulusRebate Payments
Page 2
 
Tax-Wise Gifting Strategies for Seniors
 
You've spent most of your life building your wealth. Now, your concern may have shiftedto reducing your estate and saving taxes.Making gifts is one way to reduce your estate.But because gifting can trigger federal gift tax,as well as federal generation-skipping transfer tax (GSTT) if the gift is to someone who ismore than one generation below you (e.g.,grandchildren), you'll want to consider makinggifts in ways that will minimize tax. Here aresome tax-wise gifting strategies to consider.
Take full advantage of the federal annualgift tax exclusion and lifetime exemption
For 2008, you can give tax free up to $12,000per recipient ($24,000 if the gift is from bothyou and your spouse) under the annual gifttax exclusion. Gifts over that amount are taxfree to the extent of your $1 million lifetime gifttax exemption ($2 million lifetime GSTTexemption).
Contribute to 529 plans
If you fund a 529 plan for your grandchild'scollege education, you can contribute up tofive years' worth of gifts at once; that's$60,000 per child, or $120,000 per child if youand your spouse elect to make the gift.
Pay tuition and medical expenses
You can make unlimited tax-free gifts by pay-ing medical bills or college tuition on behalf of a recipient. Payments must be made directlyto the medical care provider or college.
 Make charitable donations
Donations to charity are completely free fromgift tax and are also generally deductible for income tax purposes, subject to certainlimitations.
Make gifts and pay the gift tax
This may seem counterintuitive, but some-times making gifts and paying the gift tax canbe advantageous. The reason is that gift taxpaid is removed from your estate. So, gifttaxes paid on lifetime gifts can significantlyreduce overall federal gift and estate taxes.
Types of property to gift
Selecting the type of property to gift can bevery important. Here are some things toconsider:
Gift property that may grow substantiallyin value over time, such as commonstock, antiques, art, and real estate. Thisstrategy removes any future appreciationof this property from your estate.
Be careful when gifting appreciated prop-erty. Because a property's basis(generally its cost) is carried over to therecipient, gifts of appreciated propertycan be good in some circumstances butnot in others. You may not want to givehighly appreciated property if the recipientwill recognize a substantial capital gainwhen the property is sold. On the other hand, you may want to make that gift if the sale of the property is imminent any-way and the recipient would owe less taxthan you upon the sale.
 
You should avoid giving property that islikely to lose value after the gift has beenmade. Also, it's not generally a good ideato give away depreciated property. Therecipient's basis for recognizing a loss isthe lower of your basis (carryover basis)or the current fair market value. The re-cipient may be unable to recognize theloss on the property. Both you and therecipient may lose the loss deduction.
 
Gift assets that yield higher amounts of income instead of those that yield lower amounts. This will prevent the buildup of income in your estate. Similarly, gift as-sets that produce taxable income insteadof those that produce less taxableincome, such as municipal bonds.
 
It may be possible to reduce your owner-ship interest in a closely held business (or an interest in real estate) so that it maybe valued at a discount. For example, if you have a minority interest (49% or less)in the stock of a closely held business,you may qualify for a discount. Also, afractional interest in real property may bevalued at a discount. It may be beneficialto make a gift of stock or an interest inreal estate to qualify for the discount.
Be careful when giving S corp stock to atrust, as the business may lose S corpstatus.
When giving tocharity:
Only give to"qualified" charities. See IRS Publication 78.
 Avoid giving cash,unless you get areceipt.
You must obtain a"qualified appraisal" for donations of  property worthover $5,000 (other than cash and  publicly traded securities), and you must attach anappraisal summary (IRS Form 8283) toyour tax return.
Page 3

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