For men and women who own their own businesses, there are a few tips that can help them create a “tax scholarship” for their children, according to William Cummings, president and owner of Cummings Financial Organization, a money management firm based in Tampa, Fla.
“Hopefully people start planning early,” said Cummings, who used his ideas to help put his three children through college. Owning his own business gave him the chance, he said, to take advantage of IRS rules to help pay the tuition bills.
Cummings, who calculates that the cost of a year of public school tuition could rise past $33,000 by the 2020 academic year, offers tips that anyone can use to reduce the cost of college. They include living at home, establishing in-state residency and placing 529 plan savings in the name of a grandparent, thereby increasing the chances a student will be eligible for student aid programs.
(It’s worth noting that while 529 plans held by grandparents are not reportable on the federal student aid application, using the account to pay for college will affect the student’s aid eligibility the following year.)
There are also various tax credits, including the Lifetime Learning Credit, which allows parents to deduct $2,000 of educational expenses per year for dependent children.
Any strategy to help ease the tuition burden must be weighed against the tax consequences to the prospective student and the parents, Cummings says.
Parents, Cummings said, shouldn’t be too quick to borrow against or slow their retirement plan contributions. It might be better, he said, to use student loans or aid, “because you can’t get a scholarship for retirement.”
For small-business owners, here are Cummings’ five tax tips to pay for college without going broke.