Covering the Cost for College While Saving Tax Dollars
Saving for college should ideally take place well before your child reaches college age, but for many reasons that isn't always possible. Whether you have years to go before your children are ready for college or you already have a coed in the house, there are options available to help minimize your expenses by taking advantage of tax benefits. Below are some suggestions to get you started:
• A Qualified Tuition plan, also called a Section 529 plan, is a trust naming your child as the beneficiary. Contributions to the trust are considered taxable gifts; however, you can contribute up to $12,000 annually ($24,000 if your spouse also contributes) and escape the gift tax. If you contribute more, you can treat the gifts as if they are made over a five-year period. The earnings on the contributions accumulate tax-free until the college costs are paid from the funds. Distributions are tax-free to the extent the funds are used to pay qualified higher education expenses.
• You can establish a Coverdell Education Savings Account (ESA) and make contributions of up to $2,000 for each child under the age of 18. Although you can't deduct contributions, distributions - including earnings - are tax-free if spent on higher education expenses. If the child doesn't attend college, the money must be withdrawn when the child turns 30, or transferred tax-free to a Coverdell ESA of another member of the child's family who hasn't reached age 30.
Tuition tax credits will help save you tax dollars once the tuition bills arrive. Tax credits reduce your tax liability dollar for dollar. There are two different credits available:
• The Hope Tax Credit is available up to $1,650 in 2007 per student for the first two years of college. This equals a 100-percent credit for the first $1,100 in tuition and a 50-percent credit for the second $1,100.
• A Lifetime Learning Credit is available up to $2,000 per family for every additional year of college or graduate school. This equals a 20-percent credit for up to $10,000 in tuition for 2007.
Some deductions are also available. Deductions reduce your overall taxable income, which ultimately reduces your tax bill.
• You can deduct up to $2,500 of the interest on loans used to pay for your child's college education. The deduction is available even if you don't itemize.
• Through 2007, you may be permitted to take an above-the-line deduction of up to $4,000 for college tuition and related expenses that you pay. Your income must be less than $65,000 ($130,000 if filing a joint return). If your income is over these limits, you are allowed a deduction up to $2,000. You are allowed no deduction if your income exceeds $80,000 ($160,000 of filing a joint return).
This article is brought to you by Peter Tuttle, CPA. You may contact me by sending an e-mail via the link to the right of my active rain blog page. Please visit my website at http://www.petertuttlecpa.com/
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