Tag: Federal Tax Incentives
Saving For College: A Parent’s Guide To Federal Tax Incentives
Sanjiv Gupta CPA - 6 years ago
When your child receives the college acceptance letter in the mail from their dream school, the only thing that could make you happier is knowing that they will have the financial resources to pay for the college of choice.The cost of college for your child(ren) might be the largest expenditure you ever have. Millions of other parents face this same challenge. The good news is there are more options to save for future college expenses than ever before. The traditional investment options – taxable investment accounts, savings accounts, United States Savings Bonds and annuities – are joined with new education savings vehicles including Coverdell education savings accounts and Section 529 college savings programs.While these new investment education programs bring new opportunities, they can also make a parent’s decisions much more difficult. Understanding all of the available options is the best way to maximize the return on each dollar you save for your child’s future. It is important to remember that even though saving for your child’s education may seem overwhelming now, with savings and proper planning, college costs can be within your reach.One of the best ways to make your child’s education more affordable is to take advantage of some of the federal tax breaks geared toward savings and reducing the cost of college including:529 Plans (Qualified Tuition Programs): Tax-deferred earnings. When distributions are taken for qualified post-secondary education costs, they are tax-free.Coverdell Education Savings Accounts: Tax-deferred earnings. When distributions are taken for qualified post-secondary education costs, they are tax-free. Withdrawals from education savings accounts are also tax-free when they are taken for primary and secondary school expenses.United States Savings Bonds: I and EE savings bonds that were purchased after 1989, by someone 24 years or older, maybe redeemed tax-free for college tuition and fees for the bond owner, dependents or their spouse. The tax exclusion, in 2014, is phased out for those with incomes from $76,000 to $91,000 (for married filing jointly the incomes are phased out from $113,950 to $143,950). Each year, income levels increase.Individual Retirement Accounts: With traditional IRAs and Roth IRAs, the penalties for early withdrawals are waived when the funds are used to pay qualified post-secondary education costs for the account holder, dependants, their spouse or grandchildren. However, taxes for the withdrawal may still be due.American Opportunity Tax Credit: Available through 2017. Parents can claim a tax credit for their dependent children’s college tuition and fees equaling 100% of the first $2,000 and 25% of the following $2,000 ($2,500 maximum per child). If the student is not claimed by someone else as a dependant, they can claim the American Opportunity Credit themselves. The tax credit is phased out with incomes from $80,000 to $90,000 (for married filing jointly it is phased out from $160,000 to $180,000). The tax credit is only available when students attend a college degree program half-time or more and if they have not completed 4 years before the beginning of the tax year. The American Opportunity Credit cannot be taken more than 4 tax years. Lifetime Learning Credit: This is a tax credit for 20% of up to $10,000 in tuition and fees for the taxpayer, dependent children or their spouse. This tax credit is phased out in 2014 for incomes from $54,000 to $64,000 (for married filing jointly it is phased out for incomes from $108,000 to $128,000). When a taxpayer claims the Lifetime Learning Credit, they cannot claim the American Opportunity Credit during that tax year. With the Lifetime Learning Credit, there are no enrollment time or degree program requirements. Also, this credit has no limit on the number of years it can be claimed.Student Loan Interest Deduction: An above-the-line deduction may be taken for student loan interest up to $2,500 if the student loan was used to pay the taxpayer, dependent children or their spouse’s college costs. The student must be attending a college degree program at least half-time. In 2014, the deduction is phased out for taxpayers with incomes from $65,000 and $80,000 (for married filing jointly the deduction is phased out for income from $130,000 and $160,000). This deduction cannot be claimed by the student if he/she is a dependant on someone else’s tax return.Tax-Free Education Grants: If the recipient does not provide a service in exchange for the grant, the majority of grants are tax-free.Tax-Free Education Scholarships: If the recipient does not provide a service in exchange for the scholarship, the majority of scholarships are tax-free.Tax-Free Employer Educational Assistance: When an employer provides tuition assistance to an employee, the benefit is tax-free. It can only be used to pay the employees education, not the spouse or dependent children. Education doesn’t have to be related to the job. Also, under a Section 127 educational assistance plan, employers are able to deduct up to $5,250 in tuition and fees for college or graduate school for each employee.Your goal is to afford the college of your child’s choice. You should not look at college costs as another expense, like your rent or electric bill. Think of it as an investment in your child’s future. According to the Census Bureau, college graduates earn 85% or more than those who only have a GED certificate or high school degree. The additional income earnings for people with a college education could exceed $1 million over their lifetime.The best way to make sure that your child has higher education options later is to save now. That way your child can base their college selection on a school that offers the best education, not the school that offers the best financial aid. Knowing that affording their college education will not be dependent on outside sources, like scholarships and loans will put your mind at ease.To maximize your college education savings, there are many vehicles available for you to choose from. It is critical that you select a suitable strategy and combine the best investment vehicles. Take time to carefully evaluate all of your options. It may be helpful to seek professional financial and tax planning advice to develop the best strategy to save for your child’s college education.
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