Paying college fees is one of the most worrying issues for many US parents and since the introduction of fees for UK universities, it is becoming a situation appreciated in my home country too. Many students are responsible and want to help parents with paying college fees but there are limited ways other than by getting a scholarship on their own merits or a job, which let’s face it, is no easy feat in an economic slump. Sometimes, we just have to be smart and take advantage of all the options. Were you aware that there are tax breaks that help with paying college fees? To my mind this is a double whammy. Not only does the IRS get less of your hard earned cash but it’s put to good use for your kids’ education. Take a look at these 7 Tax Smart Ways to Pay College Fees.
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1. Pay to College
In the US, the threshold for gift tax is $13,000. There are exemptions to this rule, and one of them is through paying course fees directly to a school. Paying for college fees in this way is an increasingly popular option amongst grandparents and other relatives outside of the immediate family. I applies to school fees only and cannot be applied to a student’s living expenses.
2. Custodial Accounts
While not most beneficial way to pay for college, the custodial account can also help teach your child about investment while giving them a tax-break. The way it works is that the account is in control of the parent up until the age of majority, which is 21 in most states. The first $950 invested is tax-free, the second is taxed at a lower child’s rate, and then everything else is taxed at the parent’s higher rate. You’ll need to contact an investment firm or mutual fund manager to take advantage of these tax benefits.
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3. 529 Plans
College fees can be paid for via a 529 plan. The money which is held as part of a 529 plan can be used to pay for college fees entirely tax-free. Tax deductions vary between states so this has to be checked out individually, but if your state has a limit with any tax deductions then it’s recommended that you open multiple accounts for the child as there are no limits on the number of accounts which one can possess.
4. 529 Gift Break
College fees can be paid for through a 529 plan, but tax can also be lowered on this plan by contributing one lump sum in one year. In 2011 the tax limit was $13,000, but if you provide 5 years worth of 529 contributions on one year then you won’t have to pay the gift tax. However the catch is you have to plan this far in advance because you can’t contribute anything else for five years if you choose this route.
5. Roth IRA
Roth IRAs are a tax-free way to help with the cost of college in a small way. This account can be opened at any age and is used for any income earned from a job; jobs can include anything from babysitting to washing cars. College fees can be paid for in part by this method of saving as contributions can be accessed tax-free. However, the maximum yearly contribution is $5,000.
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6. Opportunity the American Way
College fees can be paid for in part via a $2,500 deduction through the American Opportunity Credit. This tax-break applies if you are paying for your child’s tuition for a four year course at college. Grad school isn’t included though. In order for this to apply you have to make sure you are contributing at least $4,000 in tuition per annum and be earning under $160,000 if you are a married couple and $80,000 if you are single.
7. Take a Four Year Course
As you have already noticed, paying for college fees can be done via cutting your tax bill. But, the best way to get many of these tax cuts are to take four year courses as some of these tax-breaks only apply to four year courses.
Paying for college fees can be a hassle as there are increases in tuition fees and shrinkage in financial aid. The key is to plan early. Work out which combinations of all these tax breaks you might be able to benefit from and use them. It might be worth getting advice from a financial advisor or accountant as they should be able to show you how the Tax Smart Ways to Pay College Fees can cut thousands off your bill. What did you do to handle high college fees when you went to college?
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