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How can this be considered “fair” January 21, 2015

Posted by forwardfinancialplanning1 in Education Planning.
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As U.S. citizens, we have numerous interactions with governmental and quasi-governmental entities. Some of these organizations are notorious for being arbitrary (think—the IRS), but one can usually find some political influence that can explain an apparent inequity. However, I believe I’ve come across an unfair situation that in my opinion, can’t readily be explained.

It can be found in the formulas that are used to determine financial aid eligibility for prospective college students. (Any readers who have recently slogged through the FAFSA form are allowed to groan at this point.) In the formulas used to calculate Expected Family Contribution (EFC), it has long been known that income and assets of the parents count much less than income and assets of the child. In the EFC computation, parental income and assets are assessed at 5.64% while student income and assets can be assessed at up to 50%. The logic behind this approach is that the student himself (or herself) should have the greatest stake in his (or her) own education. In keeping with this thinking, a child with a healthy income, (an actor, for example) could readily be expected to allocate a great deal of their funds to their own education. The same logic would apply if the child had inherited a large sum, which presumably would be held in an UGMA or UTMA. To this point, all of this makes some sense.

Common sense and logic take a detour when it comes to grandparents helping out. If the grandparents own a 529 Savings Plan with the child as a beneficiary, they would not be required to enter this data on the FAFSA form. This would appear to be a financial aid “loophole” at first, but the all-knowing federal government is “on to this trick.”. If money is disbursed from the grandparents’ 529 plan to pay for say the first year of the child’s education, the ENTIRE DISBURSED AMOUNT IS DEEMED TO HAVE COME FROM THE STUDENT!! Thus, there’s this chunk of funds applied at up to 50% in the next year’s FAFSA calculation. How can this draconian approach make sense???

Clearly it would be fair to now count the grandparents’ help in a similar fashion to a parent’s income/asset and assess it at 5.64% in the EFC calculation. And, you can make a case for changing the FAFSA rules to require that ALL 529 plan assets (regardless of the owner) with the child as beneficiary should be reported on the FAFSA form. But, whacking the grandparents’ 529 plan disbursement at a rate of 50% makes no sense whatsoever. At a time when young adults all over America are drowning in student loan debt, it clearly doesn’t make sense to have a policy that penalizes grandparents from helping out.


How progressive is too progressive?? January 6, 2015

Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes.
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Some interesting stats from the IRS have to raise the question, “When does our progressive system of income taxation go too far?” Many people would agree that there is a benefit to society if those of greater means absorb a somewhat larger share of the costs of maintaining that orderly society. But, what do we mean by “somewhat larger?”

In 2012 (latest stats available–cited by The Kiplinger Tax Letter), the top 1% of all income tax filers paid a whopping 38.1% of all income taxes levied. The highest 5% paid 58.9% of total federal income tax and the top 10% bore 70.2% of the total tax burden.

At the other end of the income spectrum, the bottom 50% of filers paid 2.8% of the total federal tax. So, over half of the members of the tax paying public have little, or no skin in the game.

No wonder we have difficulties controlling entitlements!!! About half of the beneficiaries are getting everyone else to pay for it…………….