|
|
 |
|
|
 |
|
|
Tax Reform Acts in 1997 and 2001 have created several vehicles for private investors to save tax-deferred and tax-free for education expenses. Golden Gate Advisors, Inc. can help you chose the right one. There are two basic Educational Incentives plus some tax credits available. The educational incentives use gross income exclusions for certain types of income and benefits. Most have income phase-outs but one plan does not. Below is a succinct review of these programs. For additional tax information see Tax Planning Tips. 1. Coverdell Savings Accounts (also called the Educational IRA). Up to $2,000 per beneficiary who is under the age of 18 may be contributed to an Educational IRA. Any distributions to and from such accounts used to pay qualified higher educational expenses of an eligible student are excluded from income. Distributions must be completed by age 30. After that distributions are taxable and subject to a 10% penalty. Amounts can be rolled over to a new beneficiary from the same family avoiding the taxes and penalty. The allowed contribution amount is phased out at the different Modified Adjusted Gross Income (MAGI) levels depending on taxpayer filing status. MAGI is defined as the Adjusted Gross Income increased by any amounts excluded due to foreign earned income. The current range is $190,000 to $220,000 (joint). 2. Prepaid State Tuition Plans (Section 529) Earnings on qualified tuition plans accumulate free from income tax. At distribution, such earnings are included in income, but may be offset to the extent used to pay qualified tuition and fees. Qualified is defined as including tuition, fees, and room and board. Each state has set up it own 529 plan within the guidelines of the Federal rules. The total amount one beneficiary can receive is limited only to the cost of the most expensive four year university in the state. You do not have to invest in your states plan as many states are open to nonresidents. The annual exclusion is currently $55,000. Some plans allow up to $250,000 total contribution. The funds can be used for private intermediary school too it is not just limited to college level. The best feature is that the funds leave the estate of the donor but can be brought back if the donors intentions change. For example, if the grand child decides not to attend college, the grandparents can take the money back. This makes the 529 plans not only the best educational funding vehicle available but a great estate planning vehicle too. 3. Custodial Accounts ( Uniform Gift to Minors UGMA) With UGMA accounts you pay taxes every year. Until a student turns 14, the first $750 of annual gains are tax-free and the next $750 are taxed at the student's rate. Everything over that is taxed at the parent's rate. After 14, all gains are taxed at the student's capital gains tax rate. 4. Hope Scholarship Credit Available for tuition and fees incurred and paid in the first two years of post-secondary education for taxpayer, spouse, or dependent. Credit is 100% of the first $1,000 of qualified expenses paid in the tax year plus 50% of the next $1,000. Maximum is $1,500 per tax year per student. These limits indexed from 2002. MAGI phase out starts at $40,000 (single) and $80,000 (joint) 5. Lifetime Learning Credit Taxpayers family (not student) may claim 20% of qualified expenses up to $5,000 ( $10,000 after 2002) limited to $1,000 per year. Credit is not available if student received Educational IRA distributions. Can't claim both Lifetime and Hope credits in same year. The MAGI phase out is the same as the Hope Credit.
Education Funding I Tax Tips I Estates I Mortgages
|
Funding
|
