Over the past couple of months, parents have been sending their children back to school. New clothing, shoes and supplies were all secured, first-day of school pictures taken, but what about a college savings plan? Have you mapped out how you and your children will fund future college expenses? Depending on the current age of your child, there are different strategies that you can use to maximize the advantages of available tax benefits.
One popular strategy is the use of a qualified tuition program or 529 plan. These plans are established by individual state governments or by private institutions and allow you to buy tuition credits or contribute to an account designated for a child’s future education expenses. Contributions to the plan are considered taxable gifts to the child, but up to $15,000 in 2018 is eligible for the annual gift tax exclusion. Earnings grow tax-free in the account and distributions from 529 plans are tax-free, as long as they are used to pay for “qualified higher education expenses.” This definition was recently expanded by the Tax Cuts and Jobs Act to allow account holders to use up to $10,000 per year per student for elementary or secondary tuition at public, private, or religious schools. Only those distributions of earnings that aren't used for qualified expenses will be subject to income tax plus a 10% penalty.
In some circumstances, tax advantages can also be achieved using:
If your child is approaching college-age, or already there, you may need to switch your focus to applying for scholarships, considering student loans, and taking advantage of tuition tax credits on your tax return.
A new school year brings you another year closer to sending your child off to college. As intimidating as that may be, don’t put off saving for this important investment another year. Have a conversation with your tax advisor on how they can help you achieve specific college savings goals for your family.