Reduce the Cost of College Thru Proper Tax Planning

Saving for your kid's college can be harder than saving for your retirement. The clock starts ticking the day your child is born and as college draws closer, the less risk you can afford to take. Consider these tax-advantaged tools:

· Coverdell Education Savings Accounts ("ESAs") let you save up to $ 2,000 per year per student. Earnings grow tax-deferred, and withdrawals are tax free for education costs.

· Section 529 Plans are state-sponsored college savings plans. Each state sets its own lifetime contribution limit, which ranges between $ 100,000 and $ 300,000 +. Traditional "prepaid tuition" plans cover specific units of tuition such as a credit hour or course. Newer "college savings" plans invest contributions in mutual funds for potentially higher growth, generally adjusting ports from stocks to bonds and cash as your child ages. You can choose any state's plan; However, some states offer discounts for contributions to their own plans.

· US Savings Bonds let you defer tax on gains until you redeem the bond. Interest on Series EE Savings Bonds issued after 1989 to individuals age 24 or above may be tax-free if you use it the year you redeem the bond for "qualified educational costs" (tuition and fees minus tax-free scholarships, qualified state tuition plan Benefits, and costs for which you claim the American Opportunity or Lifetime Learning credit). For 2015, the exclusion phases out for households with "modified AGI" from $ 77,200-92,200 (singles and heads of households) or $ 115,750-145,750 (joint filers) and is not available for married couples filing separately.

Other Limits for ESA Plans and 529 Plans

Coverdell ESA

Donor AGI Limit of $ 110,000 ($ 220,000 joint)

Contribution Limit $ 2,000 per year

Tax-free Withdrawals for elementary, secondary, and college costs, including reasonable room and board. Expenses paid out of ESA accounts do not qualify for American Opportunity or Lifetime Learning credits. Withdrawals not used for education are taxed as ordinary income.

Must use assets by age 30, otherwise pay tax on gains or roll into another family member's ESA.

529 Plan

Contribution Limit of $ 115,000-315,000 lifetime

Withdrawals

Tax-free for "qualified higher education expenses." Withdrawals not used for college are taxable only if they exceed contributions.

You can designate new beneficiary if child chooses not to attend college.

Section 529 plans offer estate-tax breaks in addition to income-tax breaks: Contributions are considered complete gifts for gift tax purposes; You can contribute up to $ 14,000 per year per student, or $ 28,000 jointly with your spouse, with no gift tax effect; 5 year accumulation plan states that you can give a beneficary up to $ 80,000 in a single year, or $ 160,000 jointly with your spouse, so long as you give no more for the next four years; Plan assets are not included in your taxable estate unless you "front-load" contributions in a single year then die before the end of that period.

What's more is if you lose money in a 529 plan, you can close your account and deduct the loss as a miscellaneous itemized deduction. You can also transfer accounts from one plan to another, but only once a year. If you're saving for college and you own permanent life insurance, you can deposit savings dollars into your policy and take tax-free cash for college (or anything else for that matter). If you later surrender the policy, any gains exceeding your total premiums are taxed as ordinary income when you surrender the policy (hint you can still get all of your money out while not surrendering the policy).

American Opportunity / Lifetime Learning Credits

These credits are available for parents (if they claim a student as a dependent) or students (if they can not be claimed as someone else's dependent). Here are the rules:

You, your spouse, or your dependent informed at least half-time in the first four years of post-secondary education

1) Any year of postsecondary or graduate education

2) Any course of instruction at an eligible institution to acquire or improve job skills

Eligible Expenses

100% of the first $ 2,000 in expenses plus 25% of the next $ 2,000 in expenses; $ 2,500 maximum per student

20% of the first $ 10,000 in expenses; $ 2,000 annual maximum per taxpayer

· You can claim the full American Opportunity credit for as many students as qualify; However, the Lifetime Learning Credit is capped at $ 2,000 per taxpayer per year.

· The American Opportunity credit phases out as your AGI tops $ 80,000 ($ 160,000 for joint filers) (2015). The Lifetime Learning credit phases out as your AGI tops $ 55,000 ($ 110,000 joint) (2015).

· You can not claim credits for expenses you pay out of an Education Savings Account or Section 529 Plan established for that student.

· Married couples filing separately can not claim the credits.

Give Your Child Appreciated Assets to Pay College Costs

Previously it was possible to give appreciated assets to students age 18 or older before you sold them, to pay college costs. Your child's tax on those gains would be less than yours. And this move kept down your AGI, which preserves your adjustments to income, discounts, and credits. You can give each child up to $ 14,000 per year ($ 28,000 per couple) with no gift tax consensus (2015). However, since 2008 the "kiddie tax" rules now apply to full-time students under age 24, thus very limiting this strategy.

You can withdraw funds from your IRA or qualified plan for college costs (tuition, room and board, books, and fees) without the usual 10% penalty for withdrawals before age 59.. Tax breaks for parents and students generally phase out as parental AGI increases, and financial aid is based on family income and assets. Emancipating your child severs that financial cord and lets your child qualify for tax breaks and financial aid according to their own income and assets. Your child will have to provide more than half of their own support (from investment and employment income) so that they no longer qualify as your dependent. This, in turn, lets them claim their own personal exemption (which may be phased out on your return anyway).

If dorm life does not suit your scholar, consider buying them off-campus housing. As long as you can trust them not to trash the place, they'll gain some real-world financial education and responsibility along with their college courses. This offers several tax and financial advantages:

· You can treat it as a second home and deduct mortgage interest and property taxes you pay on Schedule A. Or you can treat it as rental property, charge rent, and report rental income and expenses on Schedule E.

· You can pay your child a management fee and tax-advantaged employee benefits to manage the property.

· You can title the home in your child's name (or jointly with them) and include them as a co-signer on the mortgage to help build their credit.

· A child who owns and occupations the home for two years can exclude up to $ 250,000 of gain from their income when they ever sell.

Traditional tax planning seeks to minimize tax – period. But some tax strategies actually cost you when it comes time to apply for need-based college financial aid. So it's important to know how your tax choices affect the Free Application for Federal Student Aid ("FAFSA") that schools use to assess financial need.

All schools use a "federal methodology" to calculate how much federal aid they can disburse. Some schools also use an "institutional methodology" to calculate their own aid. Both methodologies work as follows:

The student's "assessable income," minus taxes and an "income protection allowance" times 50%

+ The student's "assessable assets" times 20%

+ The parents' "assessable income," minus taxes and a living allowance times 22% to 47% (depending on income)

+ The parents' "assessable assets," minus an "asset protection allowance" (based on the older parent's age) times 5.6%

= Expected family contribution ("EFC")

"Cost of attendance" minus EFC equivalents "financial need." The key, then, is to minimize assessable income and assets until after the last FAFSA reporting period. Here are key points to consider:

· Assessable assets generally include cash, checking and savings accounts, discretionary securities and investment accounts, and vacation home equity – but not qualified plan or retirement account balances, home equity, or personal assets. Some schools using the "institutional method" also include life insurance and annuity cash values, home equity, family farm equity, and siblings' assets.

· Assessable income includes AGI (adjusted Gross income) plus various "untaxed income and benefits" such as:

O earned income and child tax credits

O tax-free interest income

O child support received

O IRA and retirement plan contributions (be careful making contributions before your children incomes college, as they are considered "up for grabs" to pay for school)

O untaxed gain on the sale of your primary residence

O gifts of cash (but not property) from friends and relatives (if grandparents or family want to make gifts, consider waiting to until after the student's last FAFSA is due, or even making gifts after graduation to retire student loans)

O some schools using the "institutional method" also include flexible spending and health savings account contributions.

Image costs are high enough that even families learning six-figure imports can qualify for need-based aid. So do not assume that your income automatically disqualifies you.

Financial financial aid decisions are based on the previous year's income and assets – in most cases, with the "base year" starting January 1 of the child's junior year in high school. This means it's best to start planning no later than the start of your child's junior year. FAFSA forms are due annually so long as the student seeks aid.

Assessable income does not include loan proceedings. This rule may make borrowing against life insurance, retirement or investment accounts, or your primary residence an appropriate source of tuition funds.

Source by Charles E Stevens

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