Carpool Money Matters
I enjoyed your column on how the economy works, in which you mentioned that your teenage son charges kids he drives to school a dollar a ride. It's nice to see a budding young entrepreneur. But your son should be careful. My understanding is that he is operating a for-hire transportation service. That brings a responsibility to report what he collects as income at tax time.
My son is safe, and so are the other kids at his high school who ask riders to contribute a buck a ride. The IRS ruled that payments you receive from passengers in a nonprofit carpool -- which my son's certainly is -- are considered reimbursement of expenses and should not be included in income.
Using savings bonds for college
In a recent column you answered a question from a reader who wanted to buy U.S. savings bonds to help pay for his 2-year-old son's college education. You stated that in order for interest on the bonds to be tax-free when used to pay for college expenses, the bonds must be held in the parent's name. But if the bonds are in the son's name, he can avoid taxes on the gain by using them to pay for his own college, right?
Wrong. It is possible to get the tax break if you pay your own college expenses with savings bonds held in your own name. But there's a big catch: You must be at least 24 years old when the bond is issued.
That means the 2-year-old child referred to in my column wouldn't qualify for the tax break, nor would any others who were under 24 when they purchased bonds (or when bonds were purchased for them).
In practice, that means that the only way most families can qualify for the tax break is to own bonds in the parent's name.
Parents, grandparents and other relatives who don't qualify for tax-free interest on savings bonds and seek other tax breaks on assets for college do have other options.
For example, you could give children appreciated stock to pay the bills. That way, you'll avoid capital-gains taxes at your rate, generally 15%. Instead, the kids will be taxed in their lower bracket -- generally 5%-- when they sell the stock.
To avoid gift taxes, limit gifts to $12,000 or less per child per year. A married couple can give up to $24,000 per child per year.