State of the Union

[Jenksismyhero]

Matt / Jenks (and anyone else), I'll try to break down my understanding of the two based upon a hypothetical scenario. I'm not in all the details of this as I haven't yet had to do a tax return based upon all these, but I'll outline it as I understand it and how you can get the general benefits. Clearly there are nuances depending on your individual income levels but I'm going to use a hypothetical scenario of a married couple filing jointly with a household income of $75K.

 

Income = 75K

Children = 1

Eligible Child Care Expenses = 12,000

Tax Rate = 25%

 

Dependent FSA: Contributed maximum of $5,000 and you used these accounts to pay for 5000 of your 12,000 in expenses. On this $5K, this money was taken off the top (similar to an IRA) and you did not pay federal income taxes on it nor did you pay social security tax or medicare taxes. That represents a 7.65% savings plus your effective tax rate of 25%, thus you have ultimately saved 32.65% (or $1632.50).

 

Now because you have spent more than just 5,000, but have an income of $75K, you are entitled to a 20% deduction of your remaining medical expenses (capped at $3K in expenses; because you have 1 child). This means that now your child care expenses from 5,001 - 8,000 will be eligible for a 20% tax deduction / benefit, which equates to $600 in savings.

 

The remaining 4,000 in child care expenses will be fully based upon after tax income.

 

Total tax savings using the two programs = 2432.50 (on 8,000). If you had a 2nd child, than you would essentially be eligible for an additional $600's (meaning only 1,000 in child care expenses would be fully based upon after tax income as you would apply this portion of the benefit to 8,001 - 11,000 in day care spent).

 

Well hell, I didn't realize you could do both. I f***ing hate our tax system. So needlessly complicated. I think i've pissed away about 600 bucks the last two years not doing this.

[StrangeSox]

I was lucky that my college was cheap so it wasn't that big of a deal to work and pay for school, but their are some in-equality from that perspective as well, and school is a heck of a lot more expensive today than it was when I went in the beginning of the century. .

That's something that a lot of the older people (50+) who complain about "kids these days whining about college, why I paid for college myself working a minimum wage job!" don't seem to get.

[Chisoxfn]

It's a very weird mindset, to me anyway, to see loss of privileged status as punishment.

 

 

 

Are we sure about that? And even if so, it's overwhelmingly benefited the wealthy from the start, so it's a very poorly designed program if that wasn't the goal.

 

 

 

The 529 changes and the AOTC expansion are part of a much broader reform proposal. Either way, that's a completely dishonest reading of what is going on here. 529 plans ostensibly exist to help the middle class, but they really don't. An expansion of the AOTC could help them much more, and we can end preferential tax treatment that the well-off don't need to fund education. If you want to keep 529's around just as another tax break for the well-off, okay, but be honest about it. It doesn't really help lower/middle class Americans pay for college, at least not nearly as much as alternative programs could.

 

It would be more honest to say "this program is supposed to help the middle class pay for college, but it's primarily just a tax break for the wealthy. Let's instead use those expenditures to actually help the middle class."

So are we just assuming that the well off are going to take care of their kids education? Technically they are adults and the responsibility for college is not that of the parents. I hope that I can bear that cost for my children (or at least a substantial cost for them when they go to school to help them get a head start in life) but that happens to be my personal belief (and I'm willing to sacrifice other things to hopefully ensure that happens). However, there are plenty of others, including people who are extremely wealthy, who might not want to give their kids a dime for college. Yet that kid who comes from a wealthy parent, but has to bear the full financial load of their education and gets no benefit and could ultimately end up starting their professional careers in a significantly worse off position from a pure financial perspective.

[StrangeSox]

I said earlier do both - it makes little sense to get rid of something just because it helps people with money. For some situations, i'm sure tax free benefits of a 529 plan may be preferred over a 2,500 credit (middle class kid going to a private school, for example).

 

And it's not adding MORE deductions/credits, it's not taking away one that already exists.

 

What school the kid goes doesn't really matter. What matters is how much their parents make and how much they can even afford to save up in the first place. It's hard to imagine your typical family of four earning $50k a year having plowed away so much money into a 529 (after their 401k and IRA, too, right?) that they'll see anything close to a $2.5k advantage from a 529.

 

It does make sense to end tax subsidies for wealthy families' educations if those same funds can be used for people who actually need it. Why should we continue a program the subsidizes Obama's, Romney's, Bush's, Clinton's etc. kids education with marginal benefits for most Americans?

[NorthSideSox72]

 

Matt / Jenks (and anyone else), I'll try to break down my understanding of the two based upon a hypothetical scenario. I'm not in all the details of this as I haven't yet had to do a tax return based upon all these, but I'll outline it as I understand it and how you can get the general benefits. Clearly there are nuances depending on your individual income levels but I'm going to use a hypothetical scenario of a married couple filing jointly with a household income of $75K.

 

Income = 75K

Children = 1

Eligible Child Care Expenses = 12,000

Tax Rate = 25%

 

Dependent FSA: Contributed maximum of $5,000 and you used these accounts to pay for 5000 of your 12,000 in expenses. On this $5K, this money was taken off the top (similar to an IRA) and you did not pay federal income taxes on it nor did you pay social security tax or medicare taxes. That represents a 7.65% savings plus your effective tax rate of 25%, thus you have ultimately saved 32.65% (or $1632.50).

 

Now because you have spent more than just 5,000, but have an income of $75K, you are entitled to a 20% deduction of your remaining medical expenses (capped at $3K in expenses; because you have 1 child). This means that now your child care expenses from 5,001 - 8,000 will be eligible for a 20% tax deduction / benefit, which equates to $600 in savings.

 

The remaining 4,000 in child care expenses will be fully based upon after tax income.

 

Total tax savings using the two programs = 2432.50 (on 8,000). If you had a 2nd child, than you would essentially be eligible for an additional $600's (meaning only 1,000 in child care expenses would be fully based upon after tax income as you would apply this portion of the benefit to 8,001 - 11,000 in day care spent).

 

 

Well hell, I didn't realize you could do both. I f***ing hate our tax system. So needlessly complicated. I think i've pissed away about 600 bucks the last two years not doing this.

 

It really is. You should get on that FSA right quick though.

 

[StrangeSox]

So are we just assuming that the well off are going to take care of their kids education? Technically they are adults and the responsibility for college is not that of the parents. I hope that I can bear that cost for my children (or at least a substantial cost for them when they go to school to help them get a head start in life) but that happens to be my personal belief (and I'm willing to sacrifice other things to hopefully ensure that happens). However, there are plenty of others, including people who are extremely wealthy, who might not want to give their kids a time to college. Yet that kid who comes from a wealthy parent, but has to bear the full financial load of their education and gets no benefit and could ultimately end up starting their professional careers in a significantly worse off position from a pure financial perspective.

Those kids would be no worse off than the kids whose parents can't afford it regardless. And I'm really not sure how this ties into 529's anyway, since that's still parental funding. I'd be all for straight-up tuition grants over either a 529 or a tax credit. Like I said, California's world-class university system used to be entirely free for residents.

[Chisoxfn]

Well hell, I didn't realize you could do both. I f***ing hate our tax system. So needlessly complicated. I think i've pissed away about 600 bucks the last two years not doing this.

Like I said, this is based upon my readings and this will be my first year filing. However, I have bounced this off some of my colleagues who practice tax and they all seem to think I have it right (of course they specialize in corporate tax vs. personal).

[StrangeSox]

Well hell, I didn't realize you could do both. I f***ing hate our tax system. So needlessly complicated. I think i've pissed away about 600 bucks the last two years not doing this.

 

Having a whole bunch of different loopholes like 529's that people will call "punishment" if they're modified or eliminated is why our tax system is so complicated, you know.

[Jenksismyhero]

It's a very weird mindset, to me anyway, to see loss of privileged status as punishment.

 

 

 

Are we sure about that? And even if so, it's overwhelmingly benefited the wealthy from the start, so it's a very poorly designed program if that wasn't the goal.

 

 

 

The 529 changes and the AOTC expansion are part of a much broader reform proposal. Either way, that's a completely dishonest reading of what is going on here. 529 plans ostensibly exist to help the middle class, but they really don't. An expansion of the AOTC could help them much more, and we can end preferential tax treatment that the well-off don't need to fund education. If you want to keep 529's around just as another tax break for the well-off, okay, but be honest about it. It doesn't really help lower/middle class Americans pay for college, at least not nearly as much as alternative programs could.

 

It would be more honest to say "this program is supposed to help the middle class pay for college, but it's primarily just a tax break for the wealthy. Let's instead use those expenditures to actually help the middle class."

 

It COULD be and SHOULD be. Just because it isn't doesn't mean it's a bad law. Sometimes forcing people to be smart with their money is still good policy, even if the end result is it benefits the rich more than the middle class. Add another tax to the rich in another area if you want to offset it, that's fine with me.

 

I'm thinking of someone who is middle class or upper middle class, by no means rich, wanting to send their kid to a private school or an out of state school and taking smart and voluntarily decisions for the decade prior to actually using the 529 as intended. To me, those people still get more out of tax free growth in that account than a 2,500 credit. Over a 15 year period any decent investment vehicle is going to deliver more than 10k even with modest contributions.

 

 

[Chisoxfn]

That's something that a lot of the older people (50+) who complain about "kids these days whining about college, why I paid for college myself working a minimum wage job!" don't seem to get.

Now now, I'm not old, but people were complaining like crazy when I went to school, but for

 

UC's were more expensive (but still cheap than) but have now had similar cost increases to the point that it would be hard not to be in substantial debt if you paid on your own and I think that is crazy. My education was a total bargain.

[Jenksismyhero]

Having a whole bunch of different loopholes like 529's that people will call "punishment" if they're modified or eliminated is why our tax system is so complicated, you know.

 

529 is pretty straight forward and it's really a loophole. Put your money here, anything that it makes is tax free if used for college. That's the extent of it.

[pettie4sox]

Well hell, I didn't realize you could do both. I f***ing hate our tax system. So needlessly complicated. I think i've pissed away about 600 bucks the last two years not doing this.

 

Fire your accountant.

[StrangeSox]

It is working,

 

It's working to do what? Make college affordable for the middle class? Yeah, for some people, but not very many. Some googling indicates only 3% of Americans have one. You wouldn't expect 50% or anything (only really for people 0-25ish), but that's a tiny percentage. And for the middle class that do, it's something but it's not all that substantial. It's definitely not $2.5k/year.

 

just not for the people Obama wants it to work for. It's not as if this program is designed ONLY for people who are rich.

 

That goes back to what your policy goal is. Is the goal "subsidize education, regardless of need" or is it "subsidize education to make it more affordable for those who need it?" I don't particularly care for a program that "works" to mainly subsidize wealthy families' educations with little benefit to the rest of us.

 

It would greatly benefit the middle class. They just have to use it.

For whatever reason, they're not. So why stick with a program that plainly isn't doing what you say you want it to do?

[Chisoxfn]

What school the kid goes doesn't really matter. What matters is how much their parents make and how much they can even afford to save up in the first place. It's hard to imagine your typical family of four earning $50k a year having plowed away so much money into a 529 (after their 401k and IRA, too, right?) that they'll see anything close to a $2.5k advantage from a 529.

 

It does make sense to end tax subsidies for wealthy families' educations if those same funds can be used for people who actually need it. Why should we continue a program the subsidizes Obama's, Romney's, Bush's, Clinton's etc. kids education with marginal benefits for most Americans?

The other question comes in to what is "wealthy". I will always argue "wealthy" is different depending on where you live (maybe that is cause I life in California where cost of living is absurd). Wealth almost needs to be based upon some form of COL factor by area. The reality is there are pretty significant differences in cost of living depending on where you live. Middle Class means 25K - 75K which is a pretty wide ass definition and upper mid is in the low 100's IIRC.

[StrangeSox]

529 is pretty straight forward and it's really a loophole. Put your money here, anything that it makes is tax free if used for college. That's the extent of it.

Now multiply that by about 50,000 programs and you've got our tax code. A big motivation for Obama's proposal (and Republicans have made similar points though with different proposed policies) is to greatly reduce and simplify the number of programs for college aid.

[StrangeSox]

The other question comes in to what is "wealthy". I will always argue "wealthy" is different depending on where you live (maybe that is cause I life in California where cost of living is absurd). Wealth almost needs to be based upon some form of COL factor by area. The reality is there are pretty significant differences in cost of living depending on where you live. Middle Class means 25K - 75K which is a pretty wide ass definition and upper mid is in the low 100's IIRC.

I don't have a problem with that loose definition. As noted in a couple of the links I posted, something like 80% of the benefits of 529 programs go to families making more than $150k. That's not wealthy, but that's not middle-class anywhere in the country unless you're going block-by-block.

[Chisoxfn]

Those kids would be no worse off than the kids whose parents can't afford it regardless. And I'm really not sure how this ties into 529's anyway, since that's still parental funding. I'd be all for straight-up tuition grants over either a 529 or a tax credit. Like I said, California's world-class university system used to be entirely free for residents.

In the current system, if parents contributed nothing, the kids coming from those who couldn't afford would be better off than the kids coming from those who did afford. I think there is a great place for a 529. I'm a fan of any program that encourages people to save and plan and pay for something in the future. Just as I am a huge fan of us incentivizing retirement (through IRA's) because I think these are all things that we as individuals should control and prepare for. I do realize that you can't always prepare for them and every family has different incomes and needs and clearly a family making 30K can't possibly squirrel away enough money to send their kids to college. But to me the concept of putting me in control vs. the government, which is what these programs do, is great.

 

If you can't tell by now, I like to be in control and responsible. I don't want to be counting on the government to provide the service. I don't mind the tax incentive when it is being used as a way to encourage something critical (in this case minimizing collegiate debt and encouraging savings to provide and educate our future leaders and youth). However, when you put the money into government programs with government schools, my fear is that the overall costs will just increase even more and be even more out of control.

[Chisoxfn]

529 is pretty straight forward and it's really a loophole. Put your money here, anything that it makes is tax free if used for college. That's the extent of it.

No more of a loophole than an IRA is a loophole and I'd argue IRA's are pretty self explanatory.

[StrangeSox]

It COULD be and SHOULD be. Just because it isn't doesn't mean it's a bad law. Sometimes forcing people to be smart with their money is still good policy, even if the end result is it benefits the rich more than the middle class. Add another tax to the rich in another area if you want to offset it, that's fine with me.

 

This would just make the tax code even more complicated.

 

I'm thinking of someone who is middle class or upper middle class, by no means rich, wanting to send their kid to a private school or an out of state school and taking smart and voluntarily decisions for the decade prior to actually using the 529 as intended. To me, those people still get more out of tax free growth in that account than a 2,500 credit. Over a 15 year period any decent investment vehicle is going to deliver more than 10k even with modest contributions.

 

The growth is still tax-free. Taxes are deferred until disbursement. Most people's net federal tax rate (not sure if that's the technical term but hopefully you know what I mean) is less than 25%, so they'd need to be pulling out more than $10k a year in gains alone for the 529 to be worth more. That's why, no matter how "smart" everybody is with their money, programs designed like this will always benefit the well-off more. The Obamas just dumped $240k into their kids' 529's. Even upper-middle class Americans would have a hard time dumping that much money into a 529.

 

Plus, you know, the stock market isn't exactly stable. Same as people who were looking to retire or did retire in 2006-2008 got smashed, the same can happen to invested college funds.

[Chisoxfn]

I don't have a problem with that loose definition. As noted in a couple of the links I posted, something like 80% of the benefits of 529 programs go to families making more than $150k. That's not wealthy, but that's not middle-class anywhere in the country unless you're going block-by-block.

I define wealthy as > 500K (really in that top 2% category) and again it differs by area. I'd probably argue their are certain areas in the US where 150K (or at least the high end of the middle class range) would be simliar to 75K middle class in certain areas because of COL. Say San Francisco / New York / LA. That said I don't live their so I don't know for sure but San Fran seems pretty absurd.

[StrangeSox]

In the current system, if parents contributed nothing, the kids coming from those who couldn't afford would be better off than the kids coming from those who did afford. I think there is a great place for a 529. I'm a fan of any program that encourages people to save and plan and pay for something in the future. Just as I am a huge fan of us incentivizing retirement (through IRA's) because I think these are all things that we as individuals should control and prepare for. I do realize that you can't always prepare for them and every family has different incomes and needs and clearly a family making 30K can't possibly squirrel away enough money to send their kids to college. But to me the concept of putting me in control vs. the government, which is what these programs do, is great.

 

If you can't tell by now, I like to be in control and responsible. I don't want to be counting on the government to provide the service. I don't mind the tax incentive when it is being used as a way to encourage something critical (in this case minimizing collegiate debt and encouraging savings to provide and educate our future leaders and youth). However, when you put the money into government programs with government schools, my fear is that the overall costs will just increase even more and be even more out of control.

 

But what I'm missing is how a 529 helps an 18 year old from wealthy parents whose parents refuse to pay? Wouldn't they also have not bothered to set up a 529 in the first place, and wouldn't direct tuition assistance help them a heck of a lot more than their parents getting tax breaks?

[Chisoxfn]

This would just make the tax code even more complicated.

 

 

 

The growth is still tax-free. Taxes are deferred until disbursement. Most people's net federal tax rate (not sure if that's the technical term but hopefully you know what I mean) is less than 25%, so they'd need to be pulling out more than $10k a year in gains alone for the 529 to be worth more. That's why, no matter how "smart" everybody is with their money, programs designed like this will always benefit the well-off more. The Obamas just dumped $240k into their kids' 529's. Even upper-middle class Americans would have a hard time dumping that much money into a 529.

 

Plus, you know, the stock market isn't exactly stable. Same as people who were looking to retire or did retire in 2006-2008 got smashed, the same can happen to invested college funds.

Yeah, I'd say the Obama's 529 is in the top .25% of 529's or would presume. Did he just dump it all in because he wanted to get it all grand fathered in before he changed the program? Haha.

[StrangeSox]

I define wealthy as > 500K (really in that top 2% category) and again it differs by area. I'd probably argue their are certain areas in the US where 150K (or at least the high end of the middle class range) would be simliar to 75K middle class in certain areas because of COL. Say San Francisco / New York / LA. That said I don't live their so I don't know for sure but San Fran seems pretty absurd.

San Fran prices are absurd, but if you're talking about the larger Bay Area versus strictly San Francisco (and similar for New York), $150k still makes you fairly comfortable. The median income in San Fran is $87k, so $150k is still almost twice that.

[Chisoxfn]

But what I'm missing is how a 529 helps an 18 year old from wealthy parents whose parents refuse to pay? Wouldn't they also have not bothered to set up a 529 in the first place, and wouldn't direct tuition assistance help them a heck of a lot more than their parents getting tax breaks?

It would, but if you did direct tuition assistance, everyone is poor so it has its own failures as well. I am just stating that I have zero problem with us having programs that encourage you to "save" money for college. I see little negative to something like that and the general cost (in terms of tax savings) vs. the benefit (advanced education at a more affordable price for those who do have it) as pretty beneficial. When you already have quite a bit of benefits for the poor, it really is the middle class and upper middle class who ultimately get pinched in all of these programs and if you pull this program away, its probably the upper middle (and really the upper middle is the middle class of 20 years ago) who is most impacted (as opposed to the wealthy).

[StrangeSox]

No more of a loophole than an IRA is a loophole and I'd argue IRA's are pretty self explanatory.

"loophole" wasn't the right word, but it's yet another complication in the tax code. You can't claim to hate a big, complex tax code but then love every one of these programs that help make it so complex.