Ah, college! Football games, parties, and, oh yes—classes and a higher education while you’re at it. Already this month many students are heading off to school, and for better or worse, payment deadlines for tuition and other fees are not far behind—in fact, you or your clients may already have started to pay up, for several months already if you’re on a payment plan or for the first semester (many colleges’ deadline to pay for the Fall semester is August 1).
So let’s review your options for saving for college before paying, excluding 529 plans, and some of the tax benefits that can help offset college costs.
Three Options for Saving for College
1) Coverdell Accounts Don’t forget that your clients can contribute up to $2,000 per year to Coverdell Education Savings Accounts through 2012 for those under age eighteen and special needs beneficiaries. The account is tax-exempt, and the IRS reminds taxpayers that distributions of earnings from Coverdell accounts are tax-free if used for “qualified education expenses.” In general, qualified education expenses means tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible educational institution.
2) Savings Bonds Your clients may also be able to cash in qualified U.S. savings bonds without having to include in income some or all of the interest earned on the bonds, if:
- You pay qualified education expenses for yourself, your spouse or a dependent for whom you claim an exemption on your return.
- Your modified adjusted gross income for 2012 is less than $87,850 ($139,250 if married filing jointly or qualifying widow(er) with a dependent child).
- Your filing status is not married filing separately.
A qualified U.S. savings bond is a series EE bond issued after 1989, or a series I bond. The bond must be issued in your name as sole owner, or in the name of you and your spouse as co-owners. Qualified education expenses generally include tuition and fees, but not room and board.
3) IRA Distributions Pre-age-59-1/2 distributions from traditional IRAs and Roth IRAs are not subject to the 10% early distribution penalty if they don’t exceed qualified higher education expenses paid for the year.
Three IRS Tips on Offsetting College Costs
- American Opportunity Credit
This credit was extended through 2012. It can amount up to $2,500 per eligible student, and is available for the first four years of post-secondary education. Forty percent of this credit is refundable, which means that your client may be able to receive up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course-related books, supplies and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 for married couples filing a joint return).
- Lifetime Learning Credit In 2012, your client may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled in eligible educational institutions. There is no limit on the number of years you can claim the credit for an eligible student, but to claim the credit, your modified adjusted gross income (AGI) must be below $52,000 ($104,000 if married filing jointly).
- Student loan interest deduction Generally, personal interest, other than mortgage interest, is not deductible. However, if your client’s modified AGI is less than $75,000 ($155,000 if filing a joint return), you may be able to deduct interest paid on a student loan for higher education. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.
For more on college planning for advisors and their clients, we invite you to read these additional AdvisorOne articles:
How the Association of African-American Financial Advisors is encouraging more black students to enter the profession, please read Quad-A: Enticing Black Students to Become Advisors.
For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s Summit Business Media partner, National Underwriter Advanced Markets, for a free trial.