Being a parent means worrying about your child’s future education. Will your son or daughter attend college? How much will your child’s college choice cost you? It’s never too early to begin planning as the cost of education continues to increase.
There are a plethora of college savings plans that help alleviate tax liabilities. A good example of a college savings plan would be a 529 Plan. The two types of 529 Plans are a savings plan and a prepaid tuition plan. It is beneficial to research which one best fits your current situation based on the state you live in, as each state offers variations in their 529 Plans.
Qualified Education Expenses and Institutions
One important factor is, your college saving plans have to comply with qualified educational expenses and eligible institution requirements in order to be tax-friendly. By default, qualified expenses include: fees, tuition, tutoring expenses, various supplies and books. However, the additional costs, such as board & room can be regulated differently.
Universities, colleges, and vocational schools usually qualify as eligible educational institutions. Here’s an overview of available college savings plans, and their main characteristics that you should consider:
1. Qualified Tuition Programs
- In some states you can use your college savings plan contributions for eligible tax deductions
- Be aware of penalties, if your distributions include non-qualified educational institutions
2. Covered ESAs (Education Savings Accounts)
- Individual contributions are allowed for the previous tax year, until the filing deadline expires, which is usually April 15
- If a beneficiary is 30 years old, then the account is required to be distributed
- Pay attention to specific requirements, especially the ones issued by the IRS
- There’s a limit of up to $2,000 per year for each beneficiary
3. Education Savings Bonds
- Please note that the bond interest isn’t taxable, in case the bond’s redeemed
- The interest rates for this plan can vary significantly
- Both cashed bond amounts and exceeded expenses can be taxable
4. IRA Distribution
- You can include the IRA distribution in your college savings plan without incurring the additional 10% tax
- The distribution amounts can be associated with gross income
- The IRA’s beneficiary can use this solution for covering educational expenses, including his/her spouse, children, stepchildren, or grandchildren
For more information on Qualified Tuition Programs, visit the IRS website:Click Here
These are all great options which can ease your tax situation. However, you should carefully choose which one you’re going to include in your college savings plan, in order to maximize your tax benefits and ensure enough savings for your college plans. Contacting a professional is always recommended as making the wrong choice could be a very costly mistake for you and your family. Holdsworth & Co., CPA’s provides full bookkeeping, accounting, tax and financial planning services for businesses and their owners. Contact Us for a free consultation!