It seems there are as many ways to save for college as there are colleges. It pays to do some research and understand ways you can not only save for your child’s education, but also save on your yearly tax bill.
Depending on how much college costs, it’s possible to use tax strategies to save as much as you spend on college tuition (particularly in the long run). Here are a few tactics to consider:
- Income shifting. This is the practice of “shifting” earned and unearned income to your child, so that you avoid paying taxes on that income. Your child may have to pay some taxes, depending on the amount and the age of your child, but will be subjected to a much lower rate. Note that unearned income (gifts) tax rules allow for a $13,000 annual exclusion per person, or $26,000 on joint returns.
- Standard deduction and personal exemption. Parents can claim a personal exemption for their child as long as they provide more than half the child’s support. If your child uses their own income as a personal support (more than half), then they can claim the exemption instead.
- Tax credits. There are several tax credits your child can claim, including the American Opportunity Tax Credit (AOTC)—worth up to $2,500 a year per student—the Hope Scholarship Credit, the Lifetime Learning Tax Credit, or the tuition and fees deduction. However, keep in mind that you can only use one.
- Watch out for the Kiddie Tax. “Kiddie Tax” is tax on unearned income to minors. It applies to children under age 19 and full-time college students under the age of 24.
Strategies used for each family will undoubtedly vary. Some strategies, such as income shifting, only makes sense for a family who will not qualify for need-based financial aid. Income shifting may save taxes, but also might consequently decrease financial aid eligibility.
Curious which of these strategies might work for you? Contact me for advice specific to your family’s situation!
Westface College Planning helps navigate the financial aid process from start to finish. To learn how we can minimize college cost, call us at 650-587-1559 or sign up for one of our Tackling the Runaway Costs of College Workshops or Webinars.
Photo Credit: Great Beyond