Wouldn’t it be nice if there was a benefit to saving and paying for college?
By Manjot Kaur & Rhodes Kline
College can be one of the most enjoyable times of people’s lives. While students are looking forward to new experiences, parents are often found stressing about how they can afford to pay for this long-term investment. Payments for books, supplies, housing, food, club dues, travel, and the biggest expense of all, tuition, can all add up and cost a fortune. As college costs are continuing to escalate across the country, college savings plans are also growing in popularity. With this in mind, it’s important to know exactly what a college savings plan can do for you and your child and how you can qualify for education credits and maximize savings on your taxes.
Qualified Tuition Programs (529 plans) are education savings plans designed to cover qualified expenses from eligible educational institutions. An eligible educational institution is a school that offers post-secondary education and is entitled to participate in a student aid program run by the U.S. Department of Education. There are no income limitations on these plans therefore people of all income levels are welcomed and encouraged to set up a plan.
Some of the 529 Plan features include:
- Ability to pay for higher education expenses such as tuition, books, fees, room and board, school supplies and equipment
- Tax free distributions, as long as they are used for qualified education expenses
- Distributions can be used for qualified undergraduate or graduate schools
- 34 states, including Virginia offer tax a deduction or credit (up to a certain limit) for contributions made during the tax year
- Virginia taxpayers can deduct $4,000 for contributions to each account per year with unlimited carry forwards to future years
- No limit on the amount of contributions
529 Plans are usually categorized into either Savings Plans or as Prepaid/Private Plans.
|Savings Plan||Prepaid/Private Plan|
|Most plans require that the account owner or the beneficiary be a resident of that state||No residency requirements|
|Most plans have an age and grade limit for the beneficiary||No age limit|
|Many state plans are guaranteed or backed by the state||No state guarantee. Works in a similar fashion as a 401K or IRA. The account value will increase or decrease based on the investment account performance|
|Covers tuition and mandatory fees only. Some plans offer to purchase a room and board option or use the excess amount for other qualified expenses||Covers all qualified education expenses listed above|
|Tuition prices are locked in instead of increasing in the future||No lock on tuition prices|
A Coverdell Education Savings Account is slightly different from a QTP 529 plan, as the Coverdell ESA is established to pay for either qualified higher education expenses or qualified elementary and secondary education expenses.
Some of the features and requirements of the Coverdell ESA include:
- While contributions to a Coverdell ESA are not deductible, contributions grow tax-free until distributed
- Distributions are tax-free if used for qualified education expenses such as tuition, books, fees, school supplies and equipment, required room and board
- There is a contribution limit of $2,000 per beneficiary per year
- The beneficiary of the account must be under the age of 18 or a special needs beneficiary
- The contributor’s modified adjusted gross income must be less than $110,000 for the year, or less than $220,000 if filing jointly
Whether you’re choosing a Qualified Tuition Program, 529 Plan or the Coverdell Education Savings Account, it is important to ask yourself some of the following questions.
- Is the plan available directly from the state or the plan sponsor?
- What fees will I be charged?
- What limitations apply to the plan?
- Would I be better off investing in my state’s plan or another?
Finally, when it is time to pay for college, parents and students can actually benefit from making tuition payments. The American Opportunity Tax Credit, Lifetime Learning Credit, and the Tuition and Fees deduction were put in place to reach a broader range of taxpayers so that families paying for college education may receive hundreds to thousands of dollars in tax savings.
Your next question might be “How can I claim one of these education credits?” To be eligible for an education credit, there are a few requirements that need to be met. The chart below shows an overview of some of the main criteria as well as what benefits come with these three tax credit opportunities.
|Criteria||American Opportunity Tax Credit||Lifetime Learning Credit||Tuition and Fees Deduction|
|Maximum Credit or benefit
(lookout for limits on MAGI)
|Up to a $2,500 credit per eligible student||Up to a $2,000 credit per return||Up to $4,000 taxable income reduction per return|
|Amount Refunded||40% of credit||Not refundable||Not refundable|
|Types of Programs Required||Student pursuing a degree or other recognized education credential||No requirement to pursue degree or other recognized education credential||Student must be enrolled at an eligible educational institution for at least one course|
|Number of Courses Required||At least half-time student for at least one academic period in tax year||One or more courses||One or more courses|
|Qualified Expenses||Tuition, required enrollment fees, and required course materials||Tuition and fees required for enrollment or attendance||Tuition and fees required for enrollment or attendance|
|Who can you claim the benefit for||You, your spouse, or a student you claim as a dependent on your return|
|Who must pay the qualified expenses||You or your spouse, student, relatives, or friends||You or your spouse, student, relatives, or friends||You or your spouse|
|Number of Tax Years Credit is Available||4 years per eligible student||Unlimited||Unlimited|
|Dependent Status||You may not claim credit if you are claimed as a dependent on someone else’s tax return|
Receiving a college education is one of the most rewarding yet most expensive experiences in life. One of the best ways to make this experience less stressful is to be as prepared as possible. Taking advantage of these education credits as well as enrolling in a savings plan can help tremendously with your finances and ultimately make the college experience most enjoyable. Please feel free to contact the MCG office or your financial advisor for more information on how you can get the most benefit from these credits or which college savings plan is right for you and your child.