Put Bonds for College Bound in Parents’ Name

Q: I want to buy U.S. Savings Bonds each year for my grandson’s college education, but I am confused as to whose name I should put on the bonds. Is it my grandson’s? His parents? Both? --C.G.

A: The bonds should be registered in the name or names of the parents--not the grandchild--if you want them to be eligible for the special “college saver” tax break upon their sale.

Although the bonds have generated considerable interest among taxpayers, the rules surrounding the year-old college saver bond program remain confusing, and often thwart many would-be participants. Simply stated, the college saver program consists of ordinary Series EE bonds, identical to any other issued by the government.

However, to be eligible for the special tax exemption, these bonds must be purchased by--or on behalf of--the future college student’s parents, who are then responsible for redeeming them when it’s time to send Johnny or Suzie off to college.

The tax break comes when the bonds are sold, but there are several important restrictions. Proceeds from the sale are exempt from federal taxes--they are exempt from state taxes anyway--if they are used to pay certain college-related expenses, such as tuition and books.

Further, the tax breaks are only allowed for taxpayers who meet specified income limits--up to a $90,000 annual adjusted gross income for families and $40,000 for single-parent households. These income limits, which apply when the bonds are sold, not when purchased, are likely to be raised over the years. However, if they are not raised, taxpayers whose income has grown substantially over the years could become ineligible for the tax break.

How Transferring Residence Affects Taxes

Q: Under California state law, are there any differences in the property tax ramifications of giving a residence to one’s children before or upon death? Property tax considerations can be an important determinant of how to pass on one’s assets to heirs. -- E.K.D.

A: Under current state law, transfers of a personal residence to one’s spouse or children are exempt from property tax roll reappraisal either before or upon death. This same exemption applies to all other real estate--not just the personal residence--transferred between spouses and children up to a maximum value of $1 million.

Statement on IRA Penalty Is Disputed

Q: I want to take issue with your recent statement that taxpayers who fail to withdraw the required minimum from their individual retirement accounts because their accounts are frozen or have insufficient funds will not be subject to government tax or penalty. I agree that the sum not withdrawn will not be taxed. But I believe that the 50% penalty will apply to the amount of mandatory withdrawal the taxpayer fails to take, regardless of the reason. -- R.J.G.

A: If you remember, this issue was raised by a reader nervous over the financial health of his S&L; and concerned that he might not have access to his account in order to take the mandatory minimum withdrawal. Although the likelihood is slight that the scenario he painted could occur, there are still occasions when taxpayers would not be able to withdraw the mandatory minimum amounts from their IRAs.

For example, what if your IRA, which you’ve put in the stock market or some other speculative investment, suddenly suffers a steep loss, and you don’t have enough money to cover the mandatory withdrawal? Are you suggesting that the IRS would assess a 50% penalty on the amount you failed to withdraw?

Well, you’re right that IRS regulations governing Sect. 4974 of the Internal Revenue Code don’t directly address this issue and leave the implication that the penalty could apply.

But representatives of the IRS assure us that taxpayers needn’t worry. The purpose of the penalty provision is to punish taxpayers who fail to withdraw the required amount in order to avoid taxation, taxpayers who engage in what the IRS terms “excess accumulation.” They are not taking aim at taxpayers whose IRAs have fallen steeply in value because of a souring investment.

The IRS says taxpayers who find themselves in this sad situation need only to attach a note to their tax return explaining why they failed to take the mandatory minimum withdrawal. The IRS promises to be understanding.