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Strategic Considerations In Funding College


Federal tax laws can help fund a child or grandchild's college education in a variety of ways.  Some key strategic considerations are outlined below:




529 College Savings Plans Are Broadened, Pros And Cons:


Named after a section of the tax code, 529 College Savings Plans have been a revolutionary tool in the struggle to pay for higher education, which for decades has risen in cost much faster than the U.S. rate of inflation.  529 Plans grow tax-free and withdrawals are also tax free, if used to pay for books, tuition, room and board.  The Tax Cuts and Jobs Act extended the 529's reach, therefore beginning in 2018, 529 Plans can also pay for private pre-college education, including K-12, religious, military, gifted, and other specialized primary and high schools.  It is important to keep in mind, paying for a child's education earlier could hurt savings for college.  College and graduate schools generally cost much more than K-12 at a private school.


Be Clear On A 529's Limits:


What if all of the 529's proceeds are not used?  There are many ways to pay for college:  financial aid and parents' pitching in, a student taking a side job to support paying tuition, etc.  If a balance remains in the 529 account, expenses other than education — like a down payment on a first home, is not permitted.  If the proceeds are used for anything other than education, a 10.0% penalty and income tax would have to be paid on the earnings segment of the withdrawal.  A better idea would be to channel the money to a relative for schooling purposes.


When Should A 529 Be Tapped?:


What if the 529 isn't enough to pay for an entire four years of college?  Is the account used at the beginning or end of a college career?  If used for the first two years, two years of growth is forfeited at the outset.  Statistically, odds favor the account growing more after taxes if withdrawals are deferred.




The American Opportunity Tax Credit:


The American Opportunity Tax Credit provides a maximum annual credit of $2,500.00.  It is unavailable for singles with adjusted gross income of more than $90,000.00 per year, or couples with more than $180,000.00.  Either the student or another taxpayer who declares the student as a dependent can take this credit.  A caveat:  The tax credit can only be taken for four consecutive years and the academic and calendar years don't line up, unless you start in January and graduate in December, four years later.  That may mean, for students who follow the traditional college schedule, only three years are available: combining the last half of freshman year, sophomore and junior years, then the first half of senior year.




Parents can claim education credits for a student dependent, if the student receives over half of his or her support from mom and dad.  The student can't earn more than $4,000.00 annually.




According to College Board, a not for profit founded in 1900 to expand access to higher education, the cost of college rose 2.3% annually for private colleges and 2.6% for public colleges in the decade ended with the 2018-19 academic year.  Private colleges are more expensive, costing an average of $34,740.00 for the 2017-18 school year, and public colleges came in at $9,970.00.  The bottom line is that it is wise for families — parents, grandparents and children — to articulate the choices and plan a comprehensive long-term strategic solution to this serious financial challenge.


Please note that the reader should discuss all strategies stated above with their accountant and/or legal advisor before implementing any of the strategies.


Legend Financial Advisors, Inc.® (Legend) is not a tax or legal advisor.  It is Legend’s intention to merely present ideas and strategies to readers to discuss with their own tax and legal advisors or in conjunction with Legend’s advisors.

©2018 Advisor Products Inc. All Rights Reserved.


©2019 Legend Financial Advisors, Inc.®. All rights reserved.