EDUCATION ISSUES
College Savings
About 48 percent of parents are saving to pay for their children's tuition, but we here at Affordable Colleges Online believe that number can (and should) increase significantly. With the help of two leading college savings experts, we created this guide to help parents and students better understand 529 plans and other college savings strategies. Key elements of the guide include:
- An in-depth look at what 529 plans are and how they work
- An extensive comparison of 529 and other savings plans
- A list of savings tips and tricks from the experts
You can get the College Saving Guide by Clicking here.
Education Credits
The Hope Credit is a tax credit equal to 100% of your first $1,100 of tuition expenses (excluding room, board, or books) and 50% of the next $1,100. The maximum credit is $1,650 per student, per year. The Hope credit is only available for the first 2 years of post-secondary education. The MAGI phase out for the Hope Credit is $47,000 - $57,000 (single) and $94,000 - $114,000 (married/joint).
Tax Tip
By foregoing the dependency exemption, the Hope education credit may be salvaged by your child when your income is too high for you to claim the credit yourself.
The Lifetime Learning Credit is also available for qualified tuition and fees paid for higher education. For 2007, the maximum Lifetime Learning Credit is 20% of qualified expenses up to $10,000 each year. The maxiumum amount for the Lifetime Learning Credit is $2,000.It's based on total expenses incurred and is not per student. While the Hope Credit is available for only the first 2 years of college, the Lifetime Learning Credit is available any time. The only restriction is that the Hope Credit and the Lifetime Learning Credit may not be used in the same year, for the same student.
Both credits are subject to the same modified AGI phase-outs and are nonrefundable. In cases where the parents cannot claim either credit because their incomes are too high, the child can take the credit if he or she has some tax liability and the parents don't claim a dependency exemption for the child. The credit is available to the child even if the parents actually pay the qualified expenses. However, the child may not claim his own personal exemption.
Education Savings Accounts (Formerly: Education IRAs)
So, you'd like your children to go to your alma mater in Boston - Harvard! Better start saving now. To help you save, you may make a nondeductible contribution each year of up to $2,000 per child to what is called an Education Savings Account (ESA) (formerly Education IRAs). Funds withdrawn from the ESA (both contributions and earnings) won't be taxed if they are used to pay for the child's qualified college expenses. However, the nontaxable distributions are not allowed if one of the education credits is used for the same expenses for the same student.
The $2,000 contribution is phased out based on the donor's modified AGI of $95,000 - $110,000 (single) or $190,000 - $220,000 (joint).. Grandparents and other family members may also make contributions for your children. So even if you don't qualify, your children can still benefit.
State Tuition Programs (IRC 529 Programs)
Another way that you may be able to finance the college education costs of your children is to participate in your state's "qualified state tuition program," if available. Generally, these tax-exempt programs allow you to purchase prepaid tuition credits on behalf of a designated child. The credits entitle the child to the waiver or payment of tuition (and in some cases room and board) at any public college or university within the state when they are qualified and ready to enroll. Thus, such programs provide an important hedge against the ever-increasing costs of getting a degree. For additional information on these programs (IRC 529) you can refer to our web resources page or to www.savingforcollege.com directly.
Tax Tip
You can now withdraw up to $10,000 from your IRA to buy a home or pay college expenses without being subject to a penalty.
The amounts distributed or the value of educational benefits provided to your child which exceed the contributions made will be taxed to the child at his lower marginal tax rate and not to you. In some cases, the benefits or distributions made will enable the child to either claim a Hope or Lifetime Learning Credit. If your child or a sibling doesn't choose to attend an in-state public institution, you may be entitled to a partially taxable refund, or the credits can be transferred to another family member.
Many Americans are finding the HOPE and Lifetime Learning tax credits are a big help when it comes to financing higher education costs for their children.
Unfortunately, both credits are subject to the same relatively low modified adjusted gross income*(MAGI) phaseout levels.
How low is low? For taxpayers who are married filing jointly, the credits phase out at MAGIs of $82,000 to $102,000. The phase-out range for taxpayers having any other filing status is $41,000 to $51,000 of MAGI. Consequently, many parents will find they can't claim either credit because their incomes are too high. Thankfully, the full credit can still be claimed by the child in some cases even if the parents actually pay the qualified education expenses. Neither the parents, nor the child, can take a dependency exemption for the child. Plus, the child must have an income tax liability of at least the amount of the credit. Thus, the net savings will be the amount gained from the tax credit less the tax benefit of the lost dependency exemption.
If you own your own business consider employing your child so that he, or she, may receive the credit.
If you think you could benefit from this planning opportunity, either now or in the future, please contact us. We can discuss your specific situation and quantify the tax savings that may be available to you.
