We don't know all the details yet but the recently passed Stimulus Package looks to have three potential benefits for families thinking about buying or refinancing a home. I wanted to share how these items can have possible benefits for college planning:
In 2008,
the conforming loan limits were increased to $729,750. The American
Recovery and Reinvestment Act of 2009 (ARRA 09) reinstates the $729,750
conforming loan limits until December 31, 2009. This means lower interest rates for loans up to this amount. Higher rates come with "jumbo loans" that exceed this amount. If your home still has equity, this could be a good thing to take advantage of lower interest rates for college planning!
The 2009 bill will offer first-time home buyers
a tax credit in the amount of $8,000 providing you purchase a home between January 1, 2009 to December 31, 2009. The
credit does NOT have
to be paid back to the government unless the buyers sell their home
within 3 years after the date of close of escrow on the home. If you have the means, this could be a great time to help your student(s) buy their first home in lieu of a dorm.
The American Recovery and Reinvestment Act of 2009 offers
incentives to existing home owners for going Green. A
tax credit of up to $1500 is given to home owners who
make some “Green” home improvements. These Green home improvements
include, but not limited to, energy efficient windows, doors, and
furnaces. So doing something to save energy costs could help reduce taxes both of which can improve tax flow for college.
As I learn more about ARRA 09, my team and I will look for ways to help college-bound families use the benefits to help pay for college!
Boy, my last post on MLM and Network Marketing opened up the floodgates of Twitters and calls! So here is what I have been sharing in response to everyone who wants to learn more about using MLM for generating revenue for college (as well as other dreams and goals).
Question 1 - Do I really have to do the 5 steps you listed in your previous blog to be a business? Idon't have the time or money to do it until I am successful with the MLM. If you want to be able to deduct expenses in excess of earnings on your taxes, per the IRS, yeah, you gotta do all 5 steps. I don't make the rules. And these steps are NOT expensive or time consuming. I would recommend if you aren't going to run it like a business, stop thinking about it as a way to make money. Just enjoy buying the products or services of the MLM at a member discount. Question 2 - Which MLM and Networking Company(s) do you recommend? This is a complicated answer so I'm going to take about 4 paragraphs to answer. I have tried many MLMs over the years including Quixtar/Amway, VitaMark, Isagenix, Arbonne, JuicePlus, Cambridge, YTB Travel, Jafra, and several that disappeared like ForceOne. Many were great, some sucked, some were out and out rip-offs. Most were sold to me by well-meaning and excited friends. The friend who sold me the sucky one disappeared from our circle of friends out of embarrassment! But in doing this blog I realized that the 3 I am with now were not sold to me by friends! They were sold by people who ran their MLMs like a BUSINESS. After learning how to really measure what makes a GREAT MLM it came down to 4 things: (1) upline support & training, (2) compensation plan (read the contracts!), (3) longevity, and dead LAST (4) the product or service. Most new MLMers get it out of order by fixating on the wonderfulness of the product and not the 3 more important items. You will never sell anything without training. You will not be successful unless you understand the compensation plan contract and how to optimize your results. And you do NOT want to be on the "ground floor". You want a company that has been around a while as a successful organization because they have survived complaints and growing pains. They have the money to be there when you have built your downline. FYI - Less than 3% of people in the US are in MLM so there is ALWAYS room for growth. You do not need ground floor. I am active in 3 MLMs. One is for basically for wholesale personal use only(NuSkin) for 4 years, two for business support (Send Out Cards for 3 years and Prepaid Legal for 14 years), and two I actually sell as an MLM business (Send Out Cards and Prepaid Legal). I am not affiliated at this moment with any vitamin or health MLMs although my sister in-laws are very successful with Isagenix.
Question 3 - Where do I find the Training I need? BEFORE YOU JOIN any MLM, meet the upline to whoever is recruiting you. Go to local training events at least 3 times and see if they are training or "rah rah" pep rallies that only teach you to sell, sell, sell. See what kinds of tools they recommend. Are they sales tools or business training tools? Can you access experts in that company even if they are not in your upline? One of the things I like about Prepaid Legal Services was the amount of business training they offer AS WELL AS the fact I am encouraged to work with local and regional successful PPL "executives" that are not in my direct upline. (There may be other MLMs that do that, I just know most I have been in do not).
Question 4 - Why should I read the compensation contract? That's a lot of stuff I don't understand. Per Michael Dlouhy of Vitamark (whom I respect), if you can't understand the contract in plain every day terms, don't join. There are probably so many wiggle words that they can take your downline away for almost anything! I would take the time to read the contract before joining. If you read something you don't understand, have the upline or home office explain it in WRITING for your files. Question 5 - Where do I learn how to run it as a business? There are lots of good books and training tapes on MLM as a business. I recommend going to Networking Times and subscribe to their Training University. Some of it is free, others are a nominal fee. They are independent and support MLM as a concept. I wrote an article for them on using MLM to pay for college that was well-received.
I hope this helps get those of you who want to learn more about using an MLM to pay for college and anything else you want to create!
WHOEEE. Got a ton of eMails and Twitter "tweets"
on using Multi-level Marketing AKA MLM AKA Network Marketing to pay for college
and other cash flow needs. What I shared was so popular, I was asked to
publish it on my blog so here you all go!
NOTE: Make sure you check with your personal tax advisor for how this information relates to your situation
(sorry, this is my official CYA).
Joining an MLM means you are now a retail customer or an "independent" representative, (associate, partner, business owner, etc.) but usually BOTH. The key to success is to understand that if you joined to sell and recruit for that MLM, you are now representing a product/service. You now own your own wholesale and commissioned sales COMPANY.
The key to success is making sure you run your COMPANY as a real business!
The IRS clearly defines what is a business and what is a hobby. If
you run your MLM as a “hobby”, you can only deduct the amount you spend up
to the amount you earn. So if you earned $400 and then bought a laptop for $1,500, you would be limited to zeroing out your
earnings but the other $1100 is not deductible as a business expense.
Sadly, most people try to run the MLM as a kinda sorta thing and drift from one MLM to another looking for the right product or company. They never learn it's not usually the product that's the proble. It's REALLY more about how they were taught (or sadly, not taught in most MLMs) to run their new MLM as a business!
GOOD NEWS is
if you do run your MLM as a business, you can go “negative” and deduct more
than you earned which may save you taxes. NOTE - you want to MAKE money in the MLM or any business you start! You are not in business to lose money! You should not join an MLM to spend more than you make! But in the early start-up days, the IRS allows you to deduct losses to help you grow into a profitable business.
The
key is to RUN YOUR BUSINESS LIKE A BUSINESS. You MUST, MUST, MUST
behave as a home-based business with a "clear intent to make a profit" as
defined by the IRS. That means you must have at LEAST the following in
place for ANY business but especially and MLM network marketing companies:
You
must use a Schedule C on your federal taxes. You
can incorporate as an S Corporation or C Corporation and use a K-1 Form but that is probably
not something you do unless you are already making a profit and probably more than $3,600 in MLM earnings.
You
MUST have a separate checking account used SOLELY for the MLM
business. It
can be a personal account but it must be separate from the account you use for
your daily life. I keep my personal account at a different bank (WAMU) than my “business” account (Wells Fargo) to keep it simple for
tracking.
You
must deposit all income checks into the MLM account and use checks from the
account ONLY for MLM activities & purchases.If
you use a personal credit card, buy something for the MLM from the other checking
account or spend cash, you MUST write yourself a check from the MLM account to reimburse yourself.You
need to keep the money separate like a real business does.
You
MUST keep books on your business. Use a checking account program
like Quicken or MS Money. Track all expenses and income through these
books. Don’t worry if they go negative in the account. This is NOT
a checkbook balancing thing. So you would put in $400 and then put in the $1500
laptop and would show a $1100 negative. You also put in your monthly costs for the product only if you share it. You cannot deduct it if you consume it personally.
Keep
track of activities like where you are when you make an MLM presentation in a
diary or calendar. Keep track of mileage, meals, sodas, Starbucks, etc.,
when you are talking about the MLM.
When
you do these 5 things, you are much more likely to be presumed by the IRS to be in a real
business. If you run the MLM like most people as a “sometime thing” or
where you are only spending money on the product and NOT selling it
retail and actively recruiting, you are presumed to be a hobby or using it for personal reasons. Then you have the "hobby" limits on deductions.
A
lot of people look at all those steps and think it’s too much work. But
it is VERY profitable if you do it right!! You want to make money, not
lose money. But in the early days of an MLM, losing money is okay if you can
deduct it all!
Let’s
assume you are in a 20% tax bracket between federal and state taxes. That
means you will be refunded 20% of your taxes for all negative
expenses. Lets assume you made $400 in 2008. So you’d get back 20% of $400 profit minus the $1500
laptop costs => 20% times $1,100 = $220 in tax savings.
Would you do the 5 steps for $220 in tax refunds?
But let's assume you use the product for marketing and it costs you $180 per month. Your potential tax savings are now 12 x $180 in
advertising = $2160 x 20% = $432 in tax savings.
So between the two –
buying a laptop and using the products – you could save $652 per year in taxes if you
are in the 20% net tax bracket. Is doing the 5 steps now worth it?
Would you do these things for $54 per month?
Anyone who follows my blogs and my career as a college funding advisor knows that I am not a fan of 529 Plans as a way to save for college. In my opinion, tax-free growth of your funds is not a good enough reason to use 529s when you discover all the "gotcha's" and gray areas surrounding them!
One of the big gotcha's used to be 529 plans would impact the Financial Aid of the beneficiary. This was changed by the 2007 College Cost Reduction Act (CCRA). The Act specifically states that qualified distributions to a student from student- and parent-owned 529s would not be included as student income on the FAFSA and would not reduce financial aid from a college to the student. However, there is a "gray" area involving grandparent-owned 529s that was brought to my attention today.
Financial and tax professionals often recommend 529 plans to grandparents like me as a way to move taxable assets out of an estate but still be able to maintain control over the gifted money should the beneficiary grandchildren not go to college. There are generous gifting limits and the growth would be untaxed as long as the distributions were used for qualified college expenses outlined by the IRS. But the distributions from a grandparent-owned 529 account were
NOTspecifically mentioned or exempted for financial aid in the CCRA!
Some financial aid experts now worry that distributions from a
grandparent-owned 529 are student income. That means they must be included in the FAFSA according to the rules that clearly state ". . . money received, or paid on your behalf
(e.g. bills), not reported elsewhere on this form must be reported." Financial aid expert
Mark Kantrowitz argues that distributions are exempt regardless of ownership based on the intent of all the regulations even if it grandparents are not specifically named. But Joe Hurley, the CPA who is considered "THE" expert on 529s, feels the situation is ambiguous.
So what do you do?
There may ways to avoid financial aid impacts by changing ownership
to the student or parent. HOWEVER, you MUST work with a VERY experienced
college financial and/or tax planner famiiar with 529 rules. The process for
gifting and changing owners between generations for 529s can be very confusing and complex.
Grandparent-owned 529s are now firmly in the gray area and that makes me uncomfortable recommending them. Students applying
for federal financial aid face potential legal and tax consequences if they receive disributions from a grandparent-owned 529! If a student does not include distributions on the FAFSA and it is later found they should have been counted, there could be taxes and the requirement that aid be refunded! If a student does include the distribution and it is later found to be exempt, they will have potentially lost financial aid including grants and scholarships for no reason!
If you are a grandparent with a 529 Plans, meet with the advisor who sold them to you and get a written opinion on their impact on financial aid including IRS and Department of Education citations. If you do not yet have a 529 plan, discuss other tax-advantaged ways to save for college such as trusts and insurance products like cash value life insurance and annuities.
The market hit extends deep into the pockets of college-bound and college families! The market melt-down has impacted many 529 Plans!
If your 529 plan uses mutual funds, you probably took a hit. Mutual funds are "buying clubs" that invest in stocks, bonds and real
estate products. So where these financial vehicles go (up or down) is
where your mutual funds go. And where your mutual funds go (up or
down), there goes your college money. And depending on your combination of mutual fund subaccounts - that hit could be anywhere from 1 to over 10% in losses. Here is a printout from today for Vanguard which I randomly selected to show you what may have happened to your 529 Plans. Click on the page to link to the original.
Depending on who runs your 529 and what mutual funds they use, you may find yourself with much less than you had last Friday!
I would recommend you call the financial professional who sold you the 529 Plan to see what makes up your investment and where you stand. Discuss your options with someone knowledgeable. BUT PLEASE DO NOT do anything rash! There are potential tax consequences to changing or liquidating accounts.
HOWEVER, if you no longer have any gains inside your account, this may be an opportunity to move your funds to a non-529 location. If you wanted to access your 529 for non-college reasons but were hesitating because of the tax hit, this may be a good time. Again, discuss this with your financial advisor!
I would also recommend you talk with an experienced COLLEGE financial professional to review all your options for college savings. There are vehicles that are not as susceptible as mutual funds to market forces.
If you own or sell 529 Plans, let me know what you think . . .
Here is a recent conversation I had with a mom I met at a birthday party for a mutual friend this past weekend in Orange County, CA. After I introduced myself, she wanted to know more about what I did for a living. Being passionate about my work, I spent about 5 minutes telling her how I help college-bound families with cash flow planning, tax capacity and minimizing debt – things she said she had never heard applied to college planning.
I then asked her about her family. She told me that their daughter was graduating from UC Davis this summer after 5 years. She told me that her husband had had to postpone retiring because they had accumulated nearly $100,000 in PLUS Loans for the direct college costs as well about $18,000 they had borrowed from their home equity line of credit for the “incidentals” that kept popping up. She had over $1,500 per month payments that were not tax-deductible.
She was quiet for a minute and then asked me where I had been for the last 5 years! She was actually angry that she had never heard of people like me. I told her that fee-based college consulting is a very specialized occupation and sadly, very few “players” in the system really know how to help families in the right way.
She informed me that all she ever saw was all about either selling her something (529s, books, insurance, even the colleges) or telling her to borrow (students, parents, home, private loans). She looked for the "free ride", did the FAFSA, read a "free report" on the "9 Secrets" from an insurance salesman, and attended every college night and seminar she could! They spent lots of time searching for scholarships and found about $3,200 all 4 years.
I then made a MAJOR mistake. I did some quick mental calculations based on what she had told me and gave her a couple of ideas that would have cut her costs in half. But before I could share some things she could do now, she told me it was MY FAULT she had all that debt and walked away, clearly upset.
I was stunned but after thinking about what she had told me, she was absolutely right to be mad! She had never been given the information I had shared! She had told me about all the places she had gone for information – the colleges, the high school, her financial planner, her tax professional, the internet – and got nothing that helped her! I was just a handy target for her anger.
Good news is she came back later in the evening and she will be meeting with me to see if there is anything we can do now. Her husband works in law enforcement and he can retire anytime but he is still working because of all their college debt. Good news is there are ideas we can use.
Then I got an eMail from Chuck Moore – one of the masters of college financial planning! He had had an almost identical situation with the head of Human Resources at a company where he had been referred! The person he was talking to had massive debt for two children who were out of college and was angry at him for failing to let people like her know they had options!
Chuck said it had really made him stop short! He felt it was partially ALL our faults in the college planning field. We were not getting our information out to enough people! No one knew they had options!
I hate to keep repeating myself, this confirms that the College Leadership Foundation and their revolutionary College eCoaching Club is the right thing for families NOW. Families who join the Club will have choices and options based on KNOWLEDGE that is unbiased and immediately useful. Visit www.CollegeLeadershipFoundation.org.
Congratulations, your student got into a great college. Hopefully they qualified for a great aid package based on need and/or merit. But there is always something left for you to pay for. How do you do it?
The first place most people look is student and parent loans. But that means a new monthly payment that grows every year of college. Rule of thumb is your monthly payment on a 10-year Parent Loan for Undergraduate Students (PLUS) is the amount you borrow divided by 80. So if you borrow $24,000 for 1 year at a state university, you would pay $300 per month. At the end of 4 years you have a payment of $1,200 -- $1,500 if your student goes 5 years. Borrow $50,000 per year for an elite ivy and your monthly payment is $2,500 or $30,000 a year! And you add it for each loan for each student you have.
If loans aren't your thing, it is VERY tempting to turn to your retirement accounts for help pay some of the costs. IRAs require you to withdraw the money – no loans. Some 401(k) and 403(b) accounts allow loans as well as withdrawals. But let’s talk about withdrawals – retirement money you take it with no plan to pay it back.
When you take no more than the total cost of attendance (COA) for the college year in a calendar year, you will only pay income tax on the total amount. Good news is there is no 10% penalty for being under age 59½ as long as you don’t take more than the COA. But you need to consider that you are losing money from your retirement. Rule of thumb is if what you withdraw would have gotten a 7% return, what you withdrew would have doubled every 10 years. So if you are 45 years old, taking $100,000 means you could be losing $400,000 in retirement assets!! NOTE - If you have ROTH IRA, there is no tax or penalty as long as you only withdraw the COA. But you still lose the growth potential.
Borrowing from your 401k/403b may seem a better idea if loans are allowed. BUT there is a bigggggg catch. If you leave the company for ANY reason, you have to pay all the money back in 60 to 90 days. If you don't put it back, the loan becomes a withdrawal and you face taxes AND penalties on whatever exceeds that year's COA. And borrowers rarely put money into their account at the same rate as before when making loan payments! So you could have a double-whammy problem.
BEFORE YOUR TOUCH a 401(k), have a financial advisor DO THE MATH to calculate how much money you have lost in growth for borrowing and/or not putting money into the account from now through retirement. I think you’ll be shocked at how much you could potentially lose. Borrowing just $8,000 ($2,000 per year) for 5 years and not deferring the same $2,000 each year means a loss of $63,000 in 30 years. Take more and for longer and you take a bigger hit!
So before you touch your retirement, make sure you look at ALL the ways to pay for college – loans, work study, home equity, lifestyle, start a home business, tax planning, scholarships, college choices, get out in 3 years, use summer school, etc., etc. the best way to pay for college is to do PLANNING for college at any age and any time in the process! I strongly urge you to get coaching from a college planning professional if you are thinking about spending retirement money for college. Or you may want to consider joining the nonprofit College Leadership Foundation's "College eCoaching Club" at www.CollegeLeadershipFoundation.org.
According to a brand new IRS ruling (Letter Ruling 200704001), your costs for sending your children to a special school to remedy a learning disability is now deductible as a medical expense on Schedule A! And this includes affiliated expenses such as special books, software - even the documented mileage to take your student to and from the location.
Here is the important requirement: For the cost of a special school to be deductible, it must be recommended by a licensed professional/physician to remedy a diagnosed disability. Essentially it must be "prescribed" for the student.
But as many of you sadly know, your medical expenses must exceed 7.5 percent of your gross income before they become deductible. And for families hit with the Alternative Minimum Tax, AMT, it disappears entirely.
So here's a potential alternative: The full cost of the school effectively becomes deductible if you pay for it through an employer's medical flexible spending account, into which you contribute part of pay on a tax-free basis to pay for medical costs. And if your employer doesn't have one, ask! And if you are self-employed or have a home-based business, create one! If you are NOT self-employed or don't have a home-based business, start one!
For more information on how you can create a medical spending account through your own small business, visit my website www.CollegeFundingNetwork.com to learn more about my unique college planning eCoaching program for small business owner college families who want to minimize college costs.
