As a parent of two boys aged 11 and 14, I can boast and say that my kids’ college is paid for. We did this through the provisions set forth in the tax code.
For parents and grandparents out there one of the best way to pay for your children’s college is through IRC §529 Plans. Contributions to this plan are not tax deductible, but the contributions grow tax free. The distributions to the beneficiary are tax free as well, as long as the distributions are used to pay for qualified higher education expenses. These expenses include tuition, fees, and books for a student that is at least a part-time student. Room and board also qualifies.
The good news about 529 plans is that there is no statutory limitation on how much you can contribute to your child’s college savings plan. The amount that someone can contribute is subject to the gift tax exclusion, which is $14,000.00 per year in 2013. If you are married and your spouse and you decide to split your gifts you can contribute $28,000.00. The best part of 529 plans is that there is no adjusted gross income limitation to be able to contribute. Anyone is allowed to participate in this plan.
If the beneficiary of the plan receives a scholarship, or decides not to go to college, or if the balance in the account is more than the qualified education benefits, you can roll the plan over to another family member and they can use the proceeds to go to college.
Another way to save for college or even private school for a beneficiary at K-12 institutions is with a Coverdell Education Plan. You can contribute up to $2,000.00 per year, per beneficiary to the plan. Just like a 529 plan, these contributions are not tax deductible.
As I mentioned the good thing about Coverdell Plans is that they can be used for K-12 private school tuition, as well as college or graduate school. The distributions can be used to pay for tuition, books, supplies, and equipment that is needed for a student.
The bad news about Coverdell Plans is that they are phased out according to your adjusted gross income. The phase out occurs at $95,000.00 - $110,000.00 for singles and married filing separately and $190,000.00 - $220,000.00 for married individuals.
Another way to save for college is through Series EE or Series I Bonds. The interest on the bonds may be tax-free when the bonds are redeemed to pay for qualified higher education. You can use the principle and interest from the bonds to pay for qualified expenses and exclude the interest from your income. If the amount of eligible bonds you have cashed during the year exceeds the amount of qualified education expenses paid during the year, the amount of excluded interest is reduced.
For 2012, the exclusion phase out range begins to be reduced to $72,850 to $87,850 for single filers and $109,250 to $139,250 for married couples. Married couples must file jointly to be eligible for the exclusion.
As you can see there are many ways to pay for your kid’s college and make it tax free.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses, The Ultimate Real Estate Investor Tax Guide, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax, The Complete Guide to the Affordable Care Act’s Tax Provisions, The Complete Guide to Retirement Plans for Small Businesses, The Complete Guide to Estate, Gift and Trust Taxation, The Complete Guide to Hiring an Accountant, The Complete Guide to Subchapter S-Corporations,, and Free Money. All available exclusively on Kindle
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