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Education
PLANNING TOPICS
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.
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