Lynn Swartz's husband died 3 years ago. Her parents, who have income of over $200,000 per year, want to ensure that funds will be available for the education of Lynn's eight-year-old son, Eric. Lynn is currently earning $45,000 a year. Lynn's parents have suggested that they start a savings account for Eric. They have calculated that if they invest $4,000 per year for the next 8 years, sufficient funds will be available at the end of 10 years for Eric's college expenses. Lynn realizes that the tax treatment of the investments could significantly affect the amount of funds available for Eric's education. Complete the letter advising her about options available to her parents and to her for Eric's college education.
Maloney, Young, Nellen, & Persellin, CPAs
5191 Natorp Boulevard
Mason, OH 45040
September 7, 2020
Ms. Lynn Swartz
100 Myrtle Cove
Fairfield, CT 06824
Dear Lynn:
You asked me to consider the tax-favored options for accumulating the funds for Eric's college education. An added complication (and opportunity for tax planning) in your case is that the funds will come from your parents, who are in a much higher tax bracket than either you or Eric. Various options are discussed below. Within some of the options, suboptions are available (i. e., your parents could give the funds to you or to Eric before the investments are made).