Whether saving for college, or paying for college, there are great strategies to utilize that may benefit your specific tax situation.
Contribute To 529 Plans
529 plans are one of the most popular ways to save for, and pay for college expenses. Their many benefits include:
- Tax Free Growth. Earnings grow tax free, and distributions are not taxable when used to pay for qualified higher education expenses.
- State Deduction. Many states allow for a deduction of certain dollar amounts of contributions made to 529 plans, which will lower your state income tax bill.
- More Than Just Tuition. Qualified higher education expenses include
- Room and board for students who are enrolled at least half-time
- Tuition, fees, books and supplies
- Computers, software, and other required equipment
- Internet access
Take Education Credits On The Return That Gives You The Greatest Benefit
It can be very frustrating to find out that your modified adjusted gross income is too high to claim an education credit or deduction, especially after making all of those expensive tuition payments for your child. By choosing not to claim your child as a dependent, that child can claim either the American Opportunity Credit, or the Lifetime Learning Credit on their tax return. This strategy works even though you are the one paying the educational expenses, as the payments are considered gifts to your child, and then treated as if they paid the expenses when claiming the tax credit.
Please note that this strategy requires a tax projection before making any decisions. It is important to do a comparison calculation before deciding if you should give up your dependency exemption in order to allow your child to claim the education credit.
Pay Tuition Directly To The Educational Organization
Gift tax does not apply, and no gift tax return needs to be filed, for tuition payments you make on behalf of an individual, directly to a qualifying educational organization. This exclusion applies to tuition only, and does not cover books, supplies, room and board, or other expenses that are not direct tuition costs.
To learn how any of these strategies could personally impact your individual situation, please contact us. We will happily run a tax projection for you, to show you the estimated amount of tax savings on your return.
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