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.
1. Hire your children
Giving the kids the chance to work is a good way to shift income. This helps because they probably won’t earn enough to owe taxes. The money can be set aside in an IRA or other investment vehicle. For example, if a child does office work or painting or lawn mowing on rental properties for, say $2,500 per year, the savings can build up over several years before high school graduation. Cummings says it’s important to document the job and ensure that the work is legitimate.
2. Stock transfer
Putting stock owned by parents in the name of a child can save tax payments. Beware, Cummings says, of the so-called kiddie tax, though, that mandates children can make at most $2,000 per year in unearned income using this strategy. Anything above that is subject to the tax rate of the parents.
3. Tuition reimbursement
Offering employees tuition reimbursement for taking college courses can lower costs because of the tax benefits associated with such programs. The IRS puts a cap of $5,250 on such a program. It’s important that all employees receive the same benefits. In other words, the children of the business owner can’t receive a benefit not available to other employees.
4. Gift or leaseback
By making a gift of a piece of property to a child and then leasing it back, the money saved in lower tax payments can be put toward paying for college, as can any lease payments. Beware of the kiddie tax mentioned in No. 2, which applies up to age 24 unless the child is no longer a dependent of the parents.
5. Divorce planning
For couples no longer married, but able to work on college strategies together, there are ways to maximize tax benefits. Generally, such planning involves deciding which parent claims a deduction for the child as a dependent, leaving the other free to take advantage of tax saving rules while avoiding the kiddie tax.