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WalletPop experts on co-signing deeds, prescriptions under health reform, and college savings

white house for refinancingUnsure if you should co-sign a deed? Trying to understand how the new health care law will affect prescription drugs? Uncertain if you should start a 529 college-savings plan now that you have a child? WalletPop experts tackle these questions and give it to you straight.

My husband and I are being added onto a deed by the title company preparing a refinance closing for my parents. The lender requires us to be on the deed to prove we own this asset, in order to co-sign on the refinance mortgage documents. Will this transaction trigger a taxable event for either party?

Answer from Barbara Weltman of
The J.K Lasser Institute
Adding your name to your parents' deed may seem like a simple thing, but there can be tax consequences. While there are no immediate income tax consequences, adding you to the deed may constitute a taxable gift to you from your parents, because you now have an ownership interest in the home. However, just because it's viewed as a gift doesn't mean there will be any gift tax. Each person can give away $13,000 per recipient, in 2010. Thus, if two parents add you and your spouse to the deed, $52,000 (or $13,000 x 4) won't be taxed. And each person gets a $1 million lifetime gift-tax exemption, so only very large gifts are actually taxed. Whether there is any gift tax depends on the value of the home. Looking ahead, when your parents ultimately die and you and your spouse become sole owners, your tax basis in the home, which can affect gain or loss when you sell the home, is different from what it would have been had you not received an interest in the home through a gift. Make sure you determine all the tax implications before you sign on the dotted line.

I've heard nothing about prescriptions in the new health care reform law. Will that be an added expense for individuals, or will it be included with medical coverage as in Medicare HMOs, like HIP with Part D coverage included?

Answer from Josh King, general counsel for Avvo.com, a free online legal directory
The health care reform law does only two things that directly impact prescriptions, and they both impact seniors: First, there will be a new $250 tax credit available for seniors who are pushed into the "doughnut hole" -- the roughly $2,000 gap between the first and second payment thresholds in Medicare Part D coverage. (Right now, participants are responsible for 100% of the cost in the doughnut hole.) Beginning in 2011, those in the hole will receive a 50% discount on prescriptions, and in 2020 the hole will be closed by increases in the share of costs picked up by Medicare. The second impact has to do with corporate retiree medical plans. The new law does away with a tax incentive that had been offered to companies to offer prescription drug benefits to retirees. Without such an incentive, some companies may choose to discontinue these benefits.

Seniors aside, prescriptions may or may not be part of the medical plans available; the new health care reform law does not mandate that insurers offer a prescription drug benefit, although many do. You'll want to shop for an insurance plan that includes the prescription drug benefit you need.

I just had a son and am already thinking about his college costs. How do I start a 529 plan, and is it the best option these days? I heard that for some 529s, my son would have to attend a state college. I don't want to limit his choices.

Answer from Tim Higgins, author of Pay for College Without Sacrificing Your Retirement
Congratulations on the birth of your son -- and also for considering college costs early! The 529 plans are great ways to save for college, because they grow tax-deferred and the money can be withdrawn tax-free for future college expenses. They especially make sense for you, given the amount of time you have to contribute and accumulate earnings.

There are two types of 529s: college savings plans and pre-paid plans. Since you do not want to limit your son's college choices, you may want to consider a savings plan, which represents the majority of the 529 market. You should first look at your own state's option, because more than 30 states offer state tax breaks if you use their option. If your state does not offer tax breaks, then you might look into the vast number of out-of-state choices. A great resource for comparing plans can be found at savingforcollege.com.

I would encourage you to select the age-based investment option within the plan you choose, assuming it has one. This will put your investment management on auto-pilot and gradually decrease the risk tolerance of the portfolio as your son approaches college age. I would also suggest that you set up an automatic monthly contribution to be made directly from your bank. In my experience, families that set up monthly contributions have the most savings when college years arrive. In addition, encourage family members to make contributions for holidays and birthdays, since anyone can add investments to your 529.

Lastly, you may also want to look into whether you can contribute to a Roth IRA. Your contributions -- not earnings -- can always be withdrawn in future years without taxes or penalties. This allows you to save into a vehicle that can be used for college or retirement. Having said that, though, you cannot go wrong with a 529 plan as they are best suited for those with young children who have time to grow the accounts.

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