What Are Allocated Loss Adjustment Expenses (ALAE)?
Allocated loss adjustment expenses (ALAE) are costs attributed to the processing of a specific insurance claim. ALAE is part of an insurer’s expense reserves. It is one of the largest expenses for which an insurer has to set aside funds, along with contingent commissions.
Key Takeaways
Allocated loss adjustment expenses (ALAE) are expenses attributed to a specific insurance claim.
ALAE, along with unallocated loss adjustment expenses (ULAE), represent an insurer’s estimate of the money it will pay out in claims and expenses.
Expenses associated with ULAE are more general and may include overhead, investigations, and salaries.
Small, straightforward claims are the easiest for an insurance company to settle and often require less ALAE when compared to claims that may take years to settle.
Understanding Allocated Loss Adjustment Expenses (ALAE)
Allocated loss adjustment expenses, along with unallocated loss adjustment expenses (ULAE), represent an insurer’s estimate of the money it will pay out in claims and expenses. Insurers set aside reserves for these expenses to ensure claims aren’t made fraudulently and to process legitimate claims quickly.
ALAEs link directly to the processing of a specific claim. These costs may include payments to third parties for activities like investigating claims, acting as loss adjusters, or as legal counsel for the insurer. Expenses associated with ULAE are more general and may include overhead, investigations, and salaries.
Life insurance companies that use in-house employees for field adjustments would report that expense as an unallocated loss adjustment expense.
Special Considerations
Some commercial liability policies contain endorsements, which require the policyholder to reimburse its insurance company for loss adjustment expenses (ALAE or ULAE). Adjusting a loss is “the process of ascertaining the value of a loss or negotiating a settlement.”
Therefore, loss adjustment expenses are most often those costs incurred by an insurance company in defending or settling a liability claim brought against its policyholder. These expenses can include fees charged by attorneys, investigators, experts, arbitrators, mediators, and other fees or expenses incidental to adjusting a claim.
It is important to carefully read the endorsement language, which may say that a loss adjustment expense is not intended to include the policyholder’s attorney fees and costs if an insurer denies coverage and a policyholder successfully sues the insurer. In this situation, where the insurance company has done no actual “adjusting” of the claim, it should not be entitled to apply its deductible to the expenses incurred by the policyholder in defending the claim abandoned by the insurance company.
ALAE vs. Unallocated Loss Adjustment Expenses (ULAE)
Insurers have gradually shifted from categorizing expenses as ULAE to categorizing them as ALAE. This is primarily because insurers are more sophisticated in how they treat claims and have more tools at their disposal to manage the costs associated with claims.
Small, straightforward claims are the easiest for an insurance company to settle and often require less ALAE when compared to claims that may take years to settle. Claims that could result in substantial losses are the most likely to receive extra scrutiny by insurers and may involve in-depth investigations, settlement offers, and litigation. With greater scrutiny comes greater cost.
Analysts can tell how accurate an insurance company has been at estimating its reserves by examining its loss reserve development. Loss reserve development involves an insurer adjusting estimates to its loss and loss adjustment expense reserves over a period of time.
What are the differences between ALAE and ULAE?
Allocated loss adjustment expenses (ALAE) are costs attributed to the processing of a specific insurance claim. ALAE is part of an insurer’s expense reserves. Expenses associated with unallocated loss adjustment are more general and may include overhead, investigations, and salaries.
What should policyholders know about “endorsements”?
Endorsements require the policyholder to reimburse the insurance company for loss adjustment expenses. Read the endorsement language, which may say that a loss adjustment expense is not intended to include the policyholder’s attorney fees and costs if an insurer denies coverage and a policyholder successfully sues the insurer.
What Is the American Opportunity Tax Credit (AOTC)?
The American Opportunity Tax Credit (AOTC) is a tax credit for qualified education expenses associated with the first four years of a student’s postsecondary education. The maximum annual credit is $2,500 per eligible student. The student, someone claiming the student as a dependent, or a spouse making postsecondary education payments can claim the AOTC on their tax return.
Key Takeaways
The American Opportunity Tax Credit (AOTC) helps offset the costs of postsecondary education for students or their parents (if the student is a dependent).
The AOTC allows an annual $2,500 tax credit for qualified tuition expenses, school fees, and course materials.
Room and board, medical costs, transportation, and insurance do not qualify, nor do qualified expenses paid for with 529 plan funds.
To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 if married filing jointly).
Understanding the American Opportunity Tax Credit (AOTC)
With the AOTC, a household with a qualifying student can receive a maximum $2,500 tax credit per year for the first four years of higher education. Parents claiming a dependent child who is a full-time student ages 19 to 24 can claim an additional $500 Child Tax Credit.
The AOTC helps with educational costs such as tuition and other expenses related to a student’s coursework. Eligible students (or their parents) can claim 100% of the first $2,000 spent on school expenses and 25% of the next $2,000. This comes out to a maximum credit of $2,500: (100% × $2,000) + (25% × $2,000).
The American Opportunity Tax Credit is partially refundable, which means that it could provide a refund even if your tax liability is $0.
In general, tax credits are refundable, nonrefundable, or partially refundable. Up to $1,000 (40%) of the AOTC is refundable, making it a partially refundable tax credit. So, if the credit brings your tax liability to $0, you can receive 40% of your eligible credit (up to $1,000) as a refund.
AOTC Eligibility Requirements
Like other tax credits, you must meet specific eligibility requirements to claim the AOTC.
Who Can Claim the AOTC?
To claim the AOTC on your tax return, you must meet all three of these requirements:
You pay qualified education expenses for higher education.
You pay the education expenses for an eligible student.
The eligible student is either you, your spouse, or a dependent whom you claim on your tax return.
Additionally, you must receive Internal Revenue Service (IRS) Form 1098-T to claim the credit. Here’s an example of a completed form:
A student is eligible for the AOTC only if they meet certain requirements. Specifically, the student must:
Be taking courses toward a degree or some other recognized education qualification
Be enrolled at least part time for at least one academic period beginning in the tax year
Not have finished the first four years of higher education at the beginning of the tax year
Not have claimed the AOTC (or the former Hope credit) for more than four tax years
Not have a felony drug conviction at the end of the tax year
Academic periods can be quarters, trimesters, semesters, or summer school sessions. If the school doesn’t have academic terms, you can treat the payment period as an academic period.
Which Expenses Qualify for the AOTC?
For the purposes of the AOTC, qualified education expenses include tuition and some related costs required for attending an eligible educational institution. An eligible educational institution is any accredited public, nonprofit, or private college, university, vocational school, or other postsecondary educational institution. Related expenses include:
Student activity fees paid to the school as a condition of enrollment or attendance
Books, supplies, and equipment needed for classes, whether or not you buy them from the school
Insurance, medical expenses (including student health fees), room and board, transportation, and living expenses do not count as qualified education expenses.
You can pay for qualified education expenses with student loans. However, you can’t claim the credit if you paid for expenses with scholarships, grants, employer-provided assistance, or funds from a 529 savings plan.
What Are the Income Limits for the AOTC?
To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 if married filing jointly). The credit begins to phase out above these limits and disappears entirely if your MAGI is above $90,000 ($180,000 for married filing jointly).
Income Limits for the American Opportunity Tax Credit
Single
Married Filing Jointly
Full Credit
$80,000 or less
$160,000 or less
Partial Credit
More than $80,000 but less than $90,000
More than $160,000 but less than $180,000
No Credit
More than $90,000
More than $180,000
Source: Internal Revenue Service
AOTC vs. Lifetime Learning Credit
The AOTC and the Lifetime Learning Credit (LLC) are popular tax breaks that people with educational expenses can claim on their annual tax returns. While similar, the LLC and the AOTC differ in several ways.
With the LLC, you can claim up to 20% of the first $10,000 of qualifying expenses ($2,000). The LLC is not limited to students pursuing a degree or studying at least part time. Instead, it covers a broader group of students—including part-time, full-time, undergraduate, graduate, and courses for skill development. Finally, the LLC is nonrefundable, meaning that once your tax bill hits zero, you won’t receive a refund on any credit balance.
American Opportunity Tax Credit (AOTC) vs. Lifetime Learning Credit (LLC)
Criteria
AOTC
LLC
Maximum Benefit
Up to $2,500 per student
Up to $2,000 per return
Credit Type
Partially refundable (40% of credit)
Nonrefundable
MAGI Limit (Single)
$90,000
$80,000
MAGI Limit (Married Filing Jointly)
$180,000
$160,000
# of Tax Years Available
Four per student
Unlimited
Program Requirement
Degree seeking
N/A
Course Load
At least half time for at least one academic period
At least one course
Qualified Expenses
Tuition, required fees, and course materials
Tuition and fees
Felony Drug Conviction
Not allowed
N/A
Source: Internal Revenue Service
If you’re eligible for both the AOTC and the LLC, be sure to assess your individual situation to determine which tax credit provides the greater benefit. The partial refundability of the AOTC can be an important factor. Of course, some taxpayers may only qualify for the LLC, making the decision easy.
You can claim the AOTC and the LLC (as well as the deduction for tuition and fees) on the same tax return—but not for the same student or the same qualified expenses.
Other Tax Breaks for Education
Federal and state governments support higher education expenses through various tax credits, tax deductions, and tax-advantaged savings plans. Each of these programs can help lower your income tax liability and make education more affordable. Beyond the AOTC and the LLC, be sure to claim any education-related tax deductions for which you may be eligible, including those for:
Savings plans can also help with higher education expenses. These are tax-advantaged accounts that allow you to save—and pay for—education expenses. Two popular programs include:
Thanks to the Tax Cuts and Jobs Act, you can now use up to $10,000 of 529 plan distributions to pay for K–12 costs per beneficiary each year. Previously, you could use the funds only for college and other postsecondary education expenses.
AOTC Example
Rosa is a full-time undergraduate college student at a four-year institution. She also works for a law firm. Her parents have a substantial 529 savings account in place, but it doesn’t cover all of Rosa’s expenses. Rosa also has a student loan with deferred payments and interest until after graduation.
Rosa and her family pay her tuition with student loans and use funds from a 529 plan to cover room and board. Rosa receives her annual 1098-T statement and, since she is working, she plans to take the AOTC herself. She is eligible for both the AOTC and the LLC, but she chooses the AOTC because it provides a larger credit and is partially refundable.
Rosa paid her tuition with a student loan, which is allowable for the AOTC. The AOTC helps alleviate any tax that she owes and she also gets a partial refund. Rosa doesn’t owe anything on her loans until after she graduates. The money distributed from the 529 was tax-free because it was used for room and board, which is a qualified 529 expense.
How Do I Claim the American Opportunity Tax Credit (AOTC)?
To claim the American Opportunity Tax Credit (AOTC), complete Form 8863 and submit it with your Form 1040 or 1040-SR when filing your annual income tax return. Enter the nonrefundable part of the credit on Schedule 3 of your 1040 or 1040-SR, line 3. The refundable portion of the credit goes on line 29 of the 1040 or 1040-SR.
Can I Claim the AOTC and the Lifetime Learning Credit?
Yes. You can claim the AOTC and the Lifetime Learning Credit (LLC) on the same tax return. However, you can’t claim both credits for the same student or the same expenses during a single tax year.
Can I Claim the AOTC if I Get a Grant?
Yes. However, you need to subtract that amount from your qualified education expenses before claiming the tax credit. So, if you have $5,000 in costs and a $4,000 grant, you would be able to claim $1,000 of qualified education expenses for the AOTC. For the purposes of the AOTC, grants include:
Tax-free parts of scholarships and fellowships
Pell Grants and other need-based education grants
Employer-provided assistance
Veterans’ educational assistance
Any other tax-free payments that you receive for educational aid (excluding gifts and inheritances)
Administrative expenses are expenses an organization incurs that are not directly tied to a specific core function such as manufacturing, production, or sales. These overhead expenses are related to the organization as a whole, as opposed to individual departments or business units.
Key Takeaways
Administrative expenses are costs incurred to support the functioning of a business, but which are not directly related to the production of a specific product or service.
Some level of administrative expenses will always be incurred as a necessary part of operations.
Administrative expenses are often among the first identified for budget cuts, because they do not directly impact a company’s main business functions.
Management may allocate administrative expenses to its business units based on a percentage of revenue, expenses, or other measures.
Understanding Administrative Expenses
Administrative expenses may include salaries of senior management and the costs associated with general services or supplies; for example, legal, accounting, clerical work, and information technology. These costs tend not to be directly related to the production of goods or services of a business and are usually excluded from gross margins.
Companies incur administrative expenses in order to perform basic operations (e.g., administer payroll or healthcare benefits), increase oversight and efficiency, and/or comply with laws and regulations. On the income statement, administrative expenses appear below cost of goods sold (COGS) and may be shown as an aggregate with other expenses such as general or selling expenses.
Some administrative expenses are fixed in nature, as they are incurred as part of the foundation of business operations. These expenses would exist regardless of the level of production or sales that occur. Other administrative expenses are semi-variable. For example, a business will always use some minimum level of electricity to keep the lights on. Beyond that point, it can take measures to reduce its electric bill.
Because a business can eliminate administrative expenses without a direct impact on the product it sells or produces, these costs are typically first in line for budget cuts. Management is strongly motivated to maintain low administrative expenses relative to other costs, as this allows a business to utilize leverage more effectively. The sales-to-administrative expense ratio helps companies to measure how much sales revenue is being portioned to covering administrative costs.
Companies can deduct from their tax returns administrative expenses that are reasonable, ordinary, and necessary for business operations. These expenses must be incurred during the usual course of business and deducted in the year they are incurred.
Other Types of Administrative Expenses
Wages and benefits to certain employees, such as accounting and IT staff, are considered administrative expenses. All executive compensation and benefits are considered an administrative expense. Building leases, insurance, subscriptions, utilities, and office supplies may be classified as a general expense or administrative expense.
Depending on the asset being depreciated, depreciation expenses may be classified as a general, administrative, or selling (marketing) expense. Organizations may choose to include consulting and legal fees as an administrative expense as well. However, research and development (R&D) costs are not considered administrative expenses.
To get the full picture of the costs associated with running certain business units, a company may allocate out administrative expenses to each of its departments based on a percentage of revenue, expenses, square footage, or other measures. Internally, this allows management to make decisions about expanding or reducing individual business units.
Example of Administrative Expenses
For example, if XYZ Company spends $4,000 monthly on electricity and records this as an administrative expense, it might allocate the cost according to the square footage each individual department occupies. Assume:
The production facility is 2,000 square feet
The manufacturing facility is 1,500 square feet
The accounting office is 750 square feet
The sales office is 750 square feet
The company occupies 5,000 square feet. The electric bill could be allocated as follows:
A 529 plan is a tax-advantaged savings plan designed to help pay for education. Originally limited to postsecondary education costs, it was expanded to cover K-12 education in 2017 and apprenticeship programs in 2019.
The two major types of 529 plans are education savings plans and prepaid tuition plans.
Education savings plans grow tax-deferred, and withdrawals are tax-free if they’re used for qualified education expenses. Prepaid tuition plans allow the account owner to pay current tuition rates for future attendance at designated colleges and universities. That means that, most likely, you can lock in a lower cost of college attendance.
529 plans are also referred to as qualified tuition programs and Section 529 plans.
Key Takeaways
529 plans are tax-advantaged accounts that can be used to pay educational expenses from kindergarten through graduate school.
There are two basic types of 529 plans: educational savings plans and prepaid tuition plans.
529 plans are sponsored and run by the 50 states and the District of Columbia.
The rules and fees of 529 plans can differ by state.
529 plans can be purchased directly from a state or via a broker or financial advisor.
Starting on Jan. 1, 2024, up to $35,000 of leftover funds in a 529 account can be rolled over into a Roth IRA account, if the fund is at least 15 years old.
Understanding 529 Plans
Although 529 plans take their name from Section 529 of the federal tax code, the plans themselves are administered by the 50 states and the District of Columbia.
Anyone can open a 529 account, but they are typically established by parents or grandparents on behalf of a child or grandchild, who is the account’s beneficiary.
In some states, the person who funds the account may be eligible for a state tax deduction for their contributions.
The money in a 529 plan grows on a tax-deferred basis until it is withdrawn. What’s more, as long as the money is used for qualified education expenses as defined by the IRS, those withdrawals aren’t subject to either state or federal taxes. In addition, some states may offer tax deductions on contributions.
In the case of K-12 students, tax-free withdrawals are limited to $10,000 per year.
Since tax benefits vary depending on the state, it’s important that you check the details of any 529 plan to understand the specific tax benefits that you may or may not be entitled to.
Types of 529 Plans
The two main types of 529 plans have some significant differences.
Education Savings Plans
529 savings plans are the more common type. The account holder contributes money to the plan. That money is invested in a pre-set selection of investment options.
Account-holders can choose the investment (usually mutual funds) that they want to invest in. How those investments perform will determine how much the account value grows over time.
Many 529 plans offer target-date funds, which adjust their assets as the years go by, becoming more conservative as the beneficiary gets closer to college age.
Withdrawals from a 529 savings plan can be used for both college and K-12 qualified expenses. Qualified expenses include tuition, fees, room and board, and related costs.
The SECURE Act of 2019 expanded tax-free 529 plan withdrawals to include registered apprenticeship program expenses and up to $10,000 in student loan debt repayment for both account beneficiaries and their siblings.
And the SECURE Act of 2022, passed as part of the 2023 Omnibus funding bill, will permit rolling over up to $35,000 of unspent funds in a 529 account into a Roth IRA account, starting on Jan. 1, 2024. To qualify, the account must be at least 15 years old,
Prepaid Tuition Plans
Prepaid tuition plans are offered by a limited number of states and some higher education institutions. They vary in their specifics, but the general principle is that they allow you to lock in tuition at current rates for a student who may not be attending college for years to come. Prepaid plans are not available for K-12 education.
As with 529 savings plans, prepaid tuition plans grow in value over time. Eventual withdrawals from the account used to pay tuition are not taxable. However, unlike savings plans, prepaid tuition plans do not cover the costs of room and board.
Prepaid tuition plans may place a restriction on which colleges they may be used for. The money in a savings plan, by contrast, can be used at almost any eligible institution.
In addition, the money paid into a prepaid tuition plan isn’t guaranteed by the federal government and may not be guaranteed by some states. Be sure you understand all aspects of the prepaid tuition plan.
There are no limits on how much you can contribute to a 529 account each year. However, many states put a cap on how much you can contribute in total. Those limits recently ranged from $235,000 to over $525,000.
Tax Advantages of 529 Plans
Withdrawals from a 529 plan are exempt from federal and state income taxes, provided the money is used for qualified educational expenses.
Any other withdrawals are subject to taxes plus a 10% penalty, with exceptions for certain circumstances, such as death or disability.
The money you contribute to a 529 plan isn’t tax deductible for federal income tax purposes. However, more than 30 states provide tax deductions or credits of varying amounts for contributions to a 529 plan.
In general, you’ll need to invest in your home state’s plan if you want a state tax deduction or credit. If you’re willing to forgo a tax break, some states will allow you to invest in their plans as a nonresident.
Advantages and Disadvantages of 529 Plans
Advantages
Disadvantages
High contribution limit
Limited investment options
Flexible plan location
Different fee levels per state
Easy to open and maintain
Fees can vary; restriction on changing plans
Tax-deferred growth
Restriction on switching investments
Tax-free withdrawals
Must be used for education
Tax-deductible contributions
Depends on state; restrictions apply
529 Plan Transferability Rules
529 plans have specific transferability rules governed by the federal tax code (Section 529).
The owner (typically you) may transfer to another 529 plan just once per year unless a beneficiary change is involved. You are not required to change plans to change beneficiaries. You may transfer the plan to another family member, who is defined as:
Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them
Brother, sister, stepbrother, or stepsister
Father or mother or ancestor of either
Stepfather or stepmother
Son or daughter of a brother or sister
Brother or sister of father or mother
Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
The spouse of any individual listed above
First cousin
You aren’t restricted to investing in your own state’s 529 plan, but doing so may get you a tax break. Be sure to check out that plan first.
Special Considerations
As with other kinds of investing, the earlier you get started, the better. With a 529 plan, your money will have more time to grow and compound the sooner it’s opened and funded.
With a prepaid tuition plan, you’ll most likely be able to lock in a lower tuition rate compared to what you’d pay down the road, since many schools raise their prices every year.
If you have money left over in a 529 plan—for instance, if the beneficiary gets a substantial scholarship or decides not to go to college at all—you’ll have several options.
One is to change the beneficiary on the account to another relative who qualifies according to the transferability rules. Another is to keep the current beneficiary in case they change their mind about attending college or later go on to graduate school. A third, starting in Jan. 2024, is to transfer unspent funds to a Roth IRA account if your account meets the requirements for doing so. Finally, you can always cash in the account and pay the taxes and 10% penalty.
How Can I Open a 529 Plan?
529 plans can be opened directly with a state. Alternatively, many brokers and financial advisors offer 529 plans. They can help you choose from a selection of plans located around the country.
How Much Does a 529 Plan Cost?
States often charge a one-time account setup fee for a 529 plan. These have ranged from as little as $25 (in Florida) to $964 (in West Virginia) for the lowest-cost option. In addition, if you bought your 529 plan through a broker or advisor, they may charge you as much as 5% or more on the assets under management. The individual investments and funds that you have inside of your 529 may also charge ongoing fees. Look for low-cost mutual funds and ETFs to keep management fees low.
Who Maintains Control Over a 529 Plan?
A 529 plan is technically a custodial account. So, an adult custodian will control the funds for the benefit of a minor. The beneficiary can assume control over the 529 once they reach age 18. However, the funds must still be used for qualifying education expenses.
What Are Qualified Expenses for a 529 Plan?
Qualified expenses for a 529 plan include:
College, graduate, or vocational school tuition and fees
Elementary or secondary school (K-12) tuition and fees
Books and school supplies
Student loan payments
Off-campus housing
Campus food and meal plans
Computers, Internet, and software used for schoolwork (student attendance required)
Special needs and accessibility equipment for students
The Bottom Line
Creating a 529 plan gives you a tax-advantaged way to save for educational expenses from kindergarten to graduate school, including apprenticeship programs. Now there is a new option to move up to $35,000 of unspent funds into a Roth IRA account if the 529 account is 15 or more years old .
