- College funding experts say college tuition is a big expense for many families, but planning a payment strategy can yield significant tax savings.
- Save on taxes by analyzing payment options, weighing state eligibility and more.
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LAS VEGAS—College tuition is a big expense for many families, but payment strategies can offer significant tax savings, according to college funding experts.
“Distribution planning is not just for retirement,” says Ross Riskin, chief learning officer and certified financial planner at the Institute for Investment and Wealth. He said planning is also needed for his family’s use of assets to pay for college.
Education funding can be complicated, especially when it comes to adjusting for college tax credit eligibility, Riskin said in the American Institute of Certified Public Accountants annual report. meeting in Las Vegas on Monday.
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of American Opportunity Tax Credit Offers up to $2,500 per undergraduate for up to four years. Lifelong learning credit Expands to graduate and professional degrees, worth up to $2,000 per eligible student per year.
However, you cannot “double” your tax relief by claiming one of these credits and withdrawing money from the 529 College Savings Plan for the same expense. Therefore, to claim full credit, you must plan ahead to use income, loans, or other eligible funds to cover a portion of your tuition fees.
“What you pay is not the same as what it costs,” said Riskin, who is also a CPA. For example, to cover $30,000 in college expenses, he’s considering three avenues: cashflow, a 529 plan, and student loans.
With an effective tax rate of 35%, if you paid $30,000 after tax for college, it would actually cost you $46,000, he said. For example, you can also take advantage of the 529 plan, which grew from an $18,000 donation and can provide tax-free withdrawals on eligible spending.
What you pay is not the same as what it costs you.
Investments & Wealth Institute Chief Learning Officer
While taking out student loans may seem counterintuitive, this strategy could potentially exempt certain nonprofits and government employees from tax-free loans in the future. Additionally, student loans may offer other benefits, such as being able to claim the U.S. opportunity tax credit and establish student credit, Riskin said.
Noting that many families default to 529 withdrawals without analyzing their other options, he said, “advisors have been hurt by trying to simplify it.”
As for the 529 plan, Riskin said there is also the option to spend the money now or save it for other family members, such as children and grandchildren. (From 2024, legislative changes will allow families to roll eligible unused funds into a Roth IRA, subject to restrictions.)
Although the Safety Act expanded eligible education expenses subject to federal tax, some states do not recognize these expenses as state taxes. For example, K-12 education is not a qualifying education expense in New York State.
If the amount withdrawn exceeds your eligible expenses, or if you withdraw money after the year in which the expenses were incurred, you may be obligated to pay additional taxes and penalties. It may also recapture state tax credits that the state previously received for donations. “The recapture piece is important,” Riskin said.