College Tax Ideas
JUST IN TIME FOR COLLEGE PLANNING …
OK, so you have a college bound senior and you are preparing a budget for their freshman year, and you have included tuition, books and other assorted expenses. After looking at all the numbers at least twice, you are no doubt asking yourself, “Is there any way to reduce the total?!”
The answer is YES! There’s a new $2,500 college tax credit for 2009 and 2010. At this point in time, it is only valid for 2009 and 2010, since it was part of the stimulus bill authorized in February. It is officially known as the American Opportunity Tax Credit. The credit may be extended, but it will take government authorization, so we will wait and see what happens after 2010.
For parents of sophomores and juniors, it is never too early to start planning ahead for college and we’ve outlined four strategies that will help you get started.
1. Start a state sponsored 529 plan. This popular option allows you to deduct all or a large portion of your contributions on your state income tax return. The earnings on a 529 plan are also allowed to grow on a tax deferred basis. Aside from the tax benefit, if the 529 plan funds are used to pay for college expenses then the earnings may be tax free at the state and federal level.
2. Establish a Coverdell ESA. This is a useful strategy as contributions to a beneficiary account can total up to $2,000 per year. While not tax deductable, contributions to a Coverdell ESA and any earnings are not taxed on the distributions as long as qualified education expenses are equal to or greater than the distributions.
3. The Uniform Gift to Minor Act (UGMA) is another way to fund the expenses of a soon-to-be college student. Donors are allowed to contribute up to $12,000 per year without any gift tax considerations.
4. The child tax credit of $1,000 is also available for children under the age of 17, which can reduce tax payments and allow those funds to be set aside for college savings.
With careful planning; the tax credits, college plans and UGMA’s mentioned above should provide a basis for preparing an effective plan to fund the upcoming college expenses of one or more high school students.
As with any new tax year, there are many changes to the tax law. Be sure to check with your tax professional regarding all the criteria for the new college tax credits and other plans available to assist with college expenses.
One of the primary goals of AZ College Solutions is to reduce a family’s college expenses before the student starts college, but we also want to make sure we keep you informed of any other items which will help make the college experience a bit more pleasant. If you would like more information on how we make college simple, please learn about our process on the web or call us at 480-993-1920. We also offer FREE seminars to help you navigate the college planning process with success and confidence.
