Thinking about college

April 1, 2001
My daughter has a substantial amount of college savings invested in Series EE savings bonds. She recently turned 14, and I want to begin reporting the income on her return now, since it will be taxed at her rate rather than mine. How do I arrange this?

Charles Blair, DDS
John McGill, MBA, CPA, JD

My daughter has a substantial amount of college savings invested in Series EE savings bonds. She recently turned 14, and I want to begin reporting the income on her return now, since it will be taxed at her rate rather than mine. How do I arrange this?

You should simply file her federal income tax return in her name, showing the total interest accumulated through 2000 and stating that your daughter now chooses to report the interest as earned each year. In this manner, federal and state income taxes on the interest income can be minimized.

I am looking for creative ways to pay for my children's college educational expenses. Inflation-indexed U.S. Savings Bonds ("I" Bonds) look like a good way to save for their education. If I redeem them to pay for college tuition, will I be taxed on the accumulated interest income?

Under current law, Series I or EE bond interest spent for post-secondary school tuition and fees (excluding room and board) isn't taxable if your adjusted gross income (married, filing jointly) is less than $81,000. If your adjusted gross income is between $81,100 and $111,100, part of the interest income is excluded.

The interest exclusion also applies if the bond proceeds are contributed to a state tuition (Section 529) plan or to an education IRA. However, you cannot offset bond interest from college expenses covered by tax-free grants, a Hope scholarship, or the lifetime learning credits.

I recently spent approximately $30,000 making various structural changes to my office building which I purchased in 1989. The changes were made to accommodate handicapped patients. My accountant says that I must depreciate these as improvements over a 39-year life, but I remember a recent seminar speaker indicating that some of these could be written off immediately. Who is correct?

Section 190 of the federal tax law allows doctors to immediately deduct (write off) up to $15,000 of expenditures made in order to accommodate handicapped and/or elderly patients.

Furthermore, Section 44 of the tax law allows a disabled access tax credit in an amount equal to 50 percent of the expenditures between $250 and $10,250 made annually, thereby providing a maximum annual tax credit of $5,000. Since the building was in use on or before Nov. 5, 1990, the improvements made to your facility should qualify. The ADA tax credit referred to above would reduce your 2000 federal income tax liability on a dollar-for-dollar basis.

In order to qualify, you should have your tax preparer complete Form 8826 to calculate the proper credit and apply it to reduce your current year's federal income tax liability. The $5,000 ADA tax credit is available in addition to the $15,000 expensing election discussed earlier.

My husband and I have transferred most of our assets into a revocable living trust, but still own our home in our joint names. If we transfer the title of our home into the trust and later sell our personal residence, will we still be able to avoid taxes on the first $500,000 of gain from the sale of our home?

Yes, transferring assets into a revocable trust during your lifetime has no effect on federal income or estate taxes. Even if the trust is set up using the name of only one spouse, as a married couple, you are still eligible for the full $500,000 exclusion, providing that each of you have occupied the home as your principal residence for at least two years.

The information provided in this column is based upon the current Internal Revenue Code, regulations, IRS rulings, and court cases as of the date of publication. This column is not to be construed as legal or tax advice with respect to any particular situation. Contact your tax attorney or other adviser before undertaking any tax-related transaction.

Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration.

John McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($177 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217 or call (704) 424-9780.

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