Tax Help with Planning for College

Posted on Tue, Nov 07, 2017 ©2021 Drucker & Scaccetti

20170823_125943 (1).jpgBy: Stefanie Ostrich, CPA


Those of us with children worry about the rising costs of college. However, with the right planning, you can find tax savings while both saving and paying for college.  In fact, from the time your bundle of joy gets their social security number, you can start saving for their education with significant tax advantages. In this post, The Tax Warriors® show you how.


Qualified Tuition Program (QTP) otherwise known as a 529 Plan:  A 529 plan is a way to save for college or post-secondary school.  Accumulated earnings are not subject to federal and state tax when distributions are used for the qualified education expenses of the designated beneficiary.  Contributions to a 529 plan have no federal tax benefit.  However, some states do offer tax benefits (for 2016, Pennsylvania allows a deduction of up to $14,000 per beneficiary by both the taxpayer and spouse).  Be aware there may be gift tax consequences if your 529 contributions plus any other gifts to a beneficiary exceed the annual gift exclusion ($14,000 for 2017) during the year.  There are special provisions in tax law that allow you to front load a 529 plan with five years of annual exclusion contributions; however, it’s important to make proper disclosure and elections on your gift tax return to take advantage of this provision.  Be sure to discuss 529 planning options with your tax and investment advisors.  Read more in our previous blogs about 529 plans:  managing unused funds in your 529 account and how to disclose plan funds were used for qualifying expenses.


Coverdell Education Savings Accounts (Coverdell ESA):  A Coverdell ESA is a way to save for college, post-secondary school or kindergarten through grade 12.  Like a 529 plan, accumulated earnings are not subject to federal tax if distributions are used for the qualified education expense of the designated beneficiary.  You may establish a Coverdell ESA if your Adjusted Gross Income (AGI) is less than $110,000 ($120,000 if married filing joint).  Contributions into the Coverdell ESA must be made before the beneficiary turns 18 (unless the beneficiary has special needs) and cannot exceed $2,000 per beneficiary per year for 2017.  You can contribute to both a Coverdell ESA and a 529 plan for the same beneficiary; however, you should remain mindful of the annual gift exclusion limitations.  The balance of  ESA account must be distributed within 30 days of the beneficiary reaching age 30.


Higher Education Credits:  If you pay for higher education for yourself, your spouse or a dependent, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit.  You should receive Form 1098-T from the educational institution indicating the amount of tuition paid for the year.  The American Opportunity Credit can reduce your tax by up to $2,500 per eligible student.  This credit can only be taken for four years per eligible student and is subject to an income limitation of $180,000 for married filing joint taxpayers ($90,000 single).  The Lifetime Learning Credit can reduce your tax by up to $2,000 per year per eligible student and is subject to an income limitation of $131,000 if married filing joint ($65,000 single).   You must complete Form 8863 and attach it to your tax return if you plan on taking either of these tax credits.


Student Loan Interest Deduction:  You can deduct interest paid on student loans to pay for your education, your spouse’s or your dependents’.  You can reduce your AGI by up to $2,500 subject to an income limitation of $160,000 for married filing joint ($80,000 single).  You should receive Form 1098-E from the lender, which indicates the amount of student loan interest you paid for the year.


Scholarships and Fellowship Grants:  Scholarships and Fellowship Grants may be tax free if you are a candidate for a degree at an eligible institution.  Scholarship and Fellowship Grants are tax free only to the extent:  1) They don’t exceed qualified education expenses; 2) They aren’t designated for other purposes and 3) They don’t represent payment for teaching, research or other services required as a condition for receiving the scholarship or fellowship grant.  If a portion of your scholarship or grant is taxable, as it does not meet the conditions listed above, it should be reported on your Form 1040 whether you receive a Form W-2 or not.


If you need help choosing the best college savings plan for your family or ensuring you are taking advantage of all the tax breaks available to you while you are paying tuition or interest on student loans, talk to a tax strategist at Drucker & Scaccetti.  We are always prepared to help.

Topics: College, Lifetime Learning Credit, 529 Plans, Distributions, paying for college, QTP, qualified tuition program, qualified education expenses, Coverdell Education Savings Accounts, Coverdell ESA, higher education credits, American opportunity credit, Form 8863, Form 1098-T, Form 1098-E, scholorships, Fellowship Grants

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