The 529 savings plan: A tax-smart way to fund college expenses
If you’re saving for college, consider a Section 529 plan. Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. (Some states do offer tax incentives for contributing.)
Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, equipment, supplies and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.
529 plans offer other benefits as well:
- They usually offer high contribution limits, and there are no income limits for contributing.
- There’s generally no beneficiary age limit for contributions or distributions.
- You can control the account, even after the child is of legal age.
- You can make tax-free rollovers to another qualifying family member.
Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions and make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse).
The biggest downside may be that your investment options — and when you can change them — are limited. Please contact us for more information on 529 plans and other tax-smart strategies for funding education expenses.
If you or a member of your family is off to college this fall, you may be eligible for the American Opportunity Tax Credit. Eligible students may take this credit for the first four years of higher education. The credit can be up to $2,500 annually. Expenses that qualify for the credit include tuition, fees, and related expenses. Forty percent of the credit is refundable, meaning you may be able to get up to $1,000 of the credit as a refund even if you don’t owe any taxes.
In its final session of the year, Congress extended a long list of tax breaks that had expired, retroactive to the beginning of 2014. But the reprieve is only temporary. The extensions granted in the Tax Increase Prevention Act of 2014 remain in effect through December 31, 2014. For these tax breaks to survive beyond that point, they must be renewed by Congress in 2015.
Although certain extended tax breaks are industry-specific, others will appeal to a wide cross-section of individuals and businesses. Here are some of the most popular items.
- The new law retains an optional deduction for state and local sales taxes in lieu of deducting state and local income taxes. This is especially beneficial for residents of states with no income tax.
- The maximum $500,000 Section 179 deduction for qualified business property, which had dropped to $25,000, is reinstated for 2014. The deduction is phased out above a $2 million threshold.
- A 50% bonus depreciation for qualified business property is revived. The deduction may be claimed in conjunction with Section 179.
- Parents may be able to claim a tuition-and-fees deduction for qualified expenses. The amount of the deduction is linked to adjusted gross income.
- An individual age 70½ and over could transfer up to $100,000 tax-free from an IRA to a charity in 2014. The transfer counts as a required minimum distribution (RMD).
- Homeowners can exclude tax on mortgage debt cancellation or forgiveness of up to $2 million. This tax break is only available for a principal residence.
- The new law preserves bigger tax benefits for mass transit passes. Employees may receive up to $250 per month tax-free as opposed to only $130 per month.
- A taxpayer is generally entitled to credit of 10% of the cost of energy-saving improvements installed in the home, subject to a $500 lifetime limit.
- Educators can deduct up to $250 of their out-of-pocket expenses. This deduction is claimed “above the line” so it is available to non-itemizers.
The remaining extenders range from enhanced deductions for donating land for conservation purposes to business tax credits for research expenses and hiring veterans.
Finally, the new law authorizes tax-free accounts for disabled individuals who use the money for qualified expenses like housing and transportation. Another provision in the law provides greater investment flexibility for Section 529 accounts used to pay for college.
Are your parents wanting to help pay for your children’s education? There are several ways to do this, each with its own limitations and tax consequences.
GIFTS- The simplest way is to have grandparents make an outright cash gift to your child each year. In 2014, you can give up to $14,000 without any gift tax liability. Even better, if grandma and grandpa both want to give, they can give jointly to each of their grandchildren, up to $28,000 per year.
DIRECT PAYMENTS- Unlimited amounts without gift tax consequences are available if payments are made directly to a qualified education institution on behalf of the child. Payments can only be for tuition. Dorm fees, meals, books, etc do not apply.
EDUCATION ACCOUNTS- Grandparents may elect to set up a Coverdell education savings account or a Section 529 plan for your child. These plans offer tax-free growth of amounts you contribute to them. Age, income, and contribution limits do apply.
To discuss te options best suited to your circumstances, speak with an expert today 910-323-3100