Though another year draws to a close, Infinity Financial Services still has a few tax tips for our clients. Many of you are saving for your kids’ college, and with college costs far exceeding what they were 20 and 30 years ago, the following advice should prove helpful.
Before you invest, there are a few important things to do:
- Confirm whether your home state (or your beneficiary’s home state) offers any state tax benefits/other benefits that are exclusive to that state. This is essential because any benefits related to a 529 plan (more information below) are only applicable to residents of the state sponsoring the plan.
- A 529 plan’s value will fluctuate over time, meaning your final value may be more or less than what your originally contributed
Research state income taxes to see whether any withdrawals will be taxed. Also, bear in mind that early/non-qualified withdrawals are assessed a 10 percent penalty.
If you want to lay a solid foundation for college savings, begin with a Section 529 plan. Not only can you deposit large amounts of money into a 529, but the money and the subsequent interest are tax-free since it will ultimately be put towards college expenses. Another bonus: you can give up to $13,000 per year to any family member, and you can deposit five years’ worth of college funds at one time. This means that you and your spouse could put as much as $130,000 into a 529 account in just one year. And in more good news, if the plan you choose is sponsored by your home state, you can save on taxes by qualifying for a state income tax deduction.
If your income is less than $65,000 as a single filing separately or below $130,000 for a married couple filing jointly, you may be able to deduct $4,000 for tuition and fees. This is classified as an "above-the-line deduction", which means you get the deduction even if your taxes aren’t itemized. Also, the deduction reduces your adjusted gross income, which could bring you into a bracket where other deductions, including unreimbursed employee expenses and medical expenses, become available.
For families not situated in the one of the highest tax brackets, two tax credits are available:
Lifetime Learning Credit
This credit consists of $2,000 applied towards qualifying tuition and tuition-related expenses. Per the IRS, this credit is obtainable by single filers earning no more than $51,000 - $61,000 per year, and married couples whose combined income doesn’t exceed $102,000 - $122,000.
American Opportunity Credit
The American Opportunity credit is applicable towards $2,500 worth of tuition, books, and course materials for the first four years of college, per student. This credit is available to college savers whose income doesn’t exceed $80,000 as a single filer or $160,000 as a joint filer. Note that these credits cannot be combined with any expenses associated with a 529 account. In addition to these three approaches, there are many more avenues that can reduce your taxes and help you in saving for college. Contact one of our professional financial advisors in Oakland to further explore your options.