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Question: I tried to open an Education Account but was told my income is too high. I'm not sure what this is based on.

M. Voight

Answer:

Dear Dear M. Voight,

It all has to do with your adjusted gross income.

Adjusted Gross Income (AGI) is one of those phrases we hear all the time, but rarely have the need to figure out just what it means and what it includes. So you have raised a good question for everyone at BUYandHOLD.

Adjusted gross income (AGI), as you discovered, is "the" critical number used in determining your federal income tax. It starts with your gross income. From that dollar amount you then subtract your deductions.

Gross income includes: wages, salary, freelance and consulting income, dividends, business profits, income from rental property and interest.
Deductions include: contributions to an IRA, SEP, SIMPLE or Keogh plan and to a medical savings account. It also includes health insurance contributions (for self employed persons), trade or business expenses, depreciation on rental property, losses from sales of property, alimony payments, moving expenses and charitable cash contributions.

An important point: AGI does not include standard or itemized deductions or personal exemptions.

Its impact: Adjusted gross income level affects your eligibility for various types of retirement accounts, including Roth IRAs and Education IRAs.

For example, here's how it applies to the Coverdell Education Savings Account. The maximum annual contribution is $2,000 per beneficiary. The beneficiary must be under age 18.

Single filers with AGIs of $95,000 or less or joint filers with an AGIs of $190,000 or less can contribute the full $2,000.

Partial contributions can be made by single filers with income between $95,000 and $110,000 and for joint filers with AGIs between $190,000 and $220,000.

If your AGI is above these caps, the IRS does not allow you to make a contribution.

However, other family and friends may be able to contribute to the same Coverdell Account that you are not eligible for. For those details, read a previous column on that topic by clicking HERE.

Good luck!

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