How Your Tax Strategy Can Help Cover Rising College Costs
Amy Keller, Ameriprise Financial
In today’s world, many families rely on more than one strategy to save for the costs of their children’s education. Whether your children are getting ready for kindergarten or graduation, capitalizing on tax-saving opportunities can help make college a financial reality.
Long-term saving strategies
The best defense to rising costs is to save early and often. While there are a variety of accounts and ways to save for college, 529 plans, Coverdell and custodial accounts offer possible tax benefits.
These plans, named after a provision in the tax code, are one of the most popular ways to build savings over time. A parent or even a non-relative can establish a 529 plan for a student, with the ability to switch potential beneficiaries anytime. The person establishing a 529 account retains control over the assets and how they are used. Any earnings grow on a tax-deferred basis and any withdrawals used to meet qualified higher education expenses of the named beneficiary are income tax free. This is a significant incentive to save for college and offers a great deal of flexibility due to the high maximum contribution amounts, which vary by state.
While contributions to a 529 plan are not deductible for federal income tax purposes, many states allow for deductions/credits on state income taxes. Check your state’s laws and consider making a contribution before the end of the year to claim a deduction/credit on your 2017 state return.
The Uniform Transfer to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) custodial accounts offer a way to transfer assets to your minor. A named custodian manages the account until the designated minor is old enough to assume ownership (usually 18 or 21 depending on the laws of your state). However, because the student is the account owner, the assets may affect his or her eligibility for financial aid. The tax benefits to the donor include reducing the size of the donor’s estate for estate tax purposes and the ability to exclude earnings on these assets from the donor’s income taxes, though income tax rules still apply to the child (and kiddie tax could have an impact).
A Coverdell education savings account, a specific type of trust or custodial account, allows you to save for higher education as well as private elementary, middle or high school expenses. Contributions are limited at $2,000 a year for a single beneficiary, and are only allowed until the minor turns 18. Any earnings in the account grow tax free, and there’s no federal tax when the money is withdrawn for qualified expenses. The account funds must be distributed before the designated beneficiary turns 30, and any remaining money will be distributed to the beneficiary with the earnings subject to tax and penalty unless the account is transferred to another family member. If the Coverdell is established for a special needs beneficiary, the rules vary.
Tax-saving strategies when you are making tuition payments
Once you transition to paying for college expenses, there are potential tax credits and deductions that may help you save money on your tax bill.
Tax credits provide a dollar-for-dollar reduction in taxes due. Credits can be earned in the year tuition is paid, in many cases, even if it is for the academic period beginning in January thru March of the following year. Payments made by the end of 2017 may qualify for a credit on this year’s tax return. Two credits you may qualify for include the American Opportunity Tax Credit and the Lifetime Learning Credit. Income restrictions and other qualifications apply, so work with your tax professional who can help you determine the best tax strategy for your situation.
Depending on your circumstances, you may qualify for deductions related to education expenses at the federal and/or state level. For example, a federal income tax deduction of up to $2,500 is available for the interest paid on a qualified education loan, however, certain income restrictions apply.
Consult with your financial advisor about the best college saving strategies for your situation, and with your tax advisor on potential tax-saving provisions of the law.
Amy Keller, is a Financial Advisor and Managing Director with Ameriprise Financial Services, Inc. in Chicago, IL. She specializes in fee-based financial planning and asset management strategies and has been in practice for 19 years. To contact her: 773.657.3374
6023 N. Cicero Avenue, Suite 2 Chicago, IL 606046
Clients contributing to a 529 Plan offered by a state in which they are not a resident, should consider, before investing, whether their or their designated beneficiary(s) home state offers any state tax or other benefits only available for investments in such state’s qualified tuition program.
Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser.
Neither Ameriprise Financial nor its affiliates or representatives may provide tax or legal advice. Consult your tax advisor or attorney regarding specific tax issues.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
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Content provided by Women Belong member Amy Keller