Child tax credit checks coming

By Deborah Adamson
Advertiser Staff Writer

Paul Dorsey shops for appliances in Plano, Texas. Dorsey, who has an 11-year-old daughter, plans to spend his tax credit check on a washer and dryer. Some financial experts advise parents to save or invest the money. Associated Press

About 108,000 households, or one out of five taxpayers, will receive up to $400 for each dependent they claimed under the child tax credit in last year's return, courtesy of the just-passed Jobs and Growth Tax Relief Reconciliation Act of 2003.

About 25 million taxpayers will be getting these checks, said IRS spokeswoman Shawn George. But those who made too much money or were too poor to pay taxes were left out.

The tax credits begin to phase out for married couples filing jointly who earned a modified adjusted gross income of $110,000 and up — or $55,000 and higher for those filing separately and $75,000 and up for singles and heads of households.

A third of the checks were mailed yesterday to taxpayers with Social Security numbers ending in 00-33. The remainder will be sent Friday to those with numbers ending in 34-66 and on Aug. 8 to those with numbers ending in 67-99.

The money is an advance on the child tax credit that taxpayers would file next April for the 2003 tax year. The act accelerated the adoption of the child tax credit increase from a maximum of $600 to $1,000 per dependent.

"Use the opportunity to kick-start your children's educational savings goal," said Eric Fujimoto, a certified financial planner with American Express Financial Advisors in Honolulu. "Use it as a symbolic gesture to take control of your family's personal economy."

That $400 — or less — might not look like much, but it could go a long way over time.

For example, if your child is 12 years away from college, investing that $400 in an investment that returns 6 percent and adding another $50 a month would give you $11,380 by 2015, according to The College Board, administrators of the SAT exam.

Time is your best friend when it comes to paying for your children's college education. The sooner you start, the better compounding works for you.

If you had started saving five years ago, you would have nearly $19,000 by 2015 for your child, given the same $400 investment and $50 a month. If you wait five more years before saving, you would amass only $6,000 by the time college rolls around.

So where should you put your money? The three most common tax-beneficial educational plans are state 529 plans, the Coverdell Education Savings Accounts and custodial accounts (Uniform Gifts to Minors Act and Uniform Transfers to Minors Act accounts).

The 529 plans are educational savings and investment programs operated by states for all income levels. Earnings in the account accumulate tax-free and withdrawals until 2010 do not incur federal taxes as well if the money is used for higher education. Unlike other plans, you stay in control of the account, not your child. Monies go toward paying for college or graduate-school tuition and costs. Your return depends on what type of investment you choose: stocks, bonds, money market or savings account.

In Hawai'i, the 529 plan is called TuitionEDGE. You will need a minimum of $15 to open an account and subsequent deposits of a minimum of $15. You can join the plan through a financial adviser or enroll directly, which may be cheaper. The maximum amount allowed in an account per child is $297,000. There's no maintenance fee for residents.

But look beyond the Hawai'i program to find the best 529 plan for your needs, said Harry Kasanow, a certified financial planner and president of Kasanow and Associates Wealth Management in Honolulu.

He likes California's 529 plan, because it is managed by well-regarded TIAA-CREF (Teachers Insurance and Annuity Association-College Retirement Equities Fund) and there's online account and trading access.

The Coverdell savings accounts are the old education IRAs. These are tax-deferred accounts — you only pay taxes when you make qualified withdrawals. But unlike the 529 plans, money accumulated in Coverdell accounts also can be used to pay for elementary and high school educations. However, only parents can open accounts for their children and you're limited to a $2,000 contribution per year.

There also are income restrictions. Starting at an adjusted gross income of $190,000 for married couples filing jointly, contributions allowed into the Coverdell account will start to decrease until it is phased out completely, said Fujimoto. For singles or heads of household, the threshold is $95,000 annually.

Custodial accounts let you invest under a child's name and an adult serves as the custodian, according to investment firm Strong Financial Corp.

Money can be used for any child-related expenses, including education. A portion of the earnings may be tax-free. There are no income limit restrictions.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.