4 Tax Saving Strategies for College Funding
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 save on your tax bill at the same time. Depending on how much college costs, it’s possible to use tax strategies to save as much as you spend on college tuition (at least in the long run). Here are a few strategies to consider:
- Income shifting. This is the practice of “shifting” earned and unearned income to your child, so that you avoid paying taxes on the income. Your child may have to pay some taxes, depending on the amount and the age of your child, but will be taxed at 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 are providing more than half the child’s support. If your child uses his own income to support himself (more than half), then he can claim the exemption instead.
- Tax credits. There are several tax credits your child can claim, including the American Opportunity Tax Credit (AOTC), the Hope Scholarship Credit, the Lifetime Learning Tax Credit, or the tuition and fees deduction – but you can only use one. The AOTC is worth up to $2,500 per student per year.
- Watch out for the Kiddie Tax. The “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.
The strategies used for each family will be different. Some strategies, like income shifting, only makes sense for a family who will not qualify for need based financial aid. Income shifting may save taxes, but may decrease financial aid eligibility.
Curious which of these strategies might work for you? Contact me for advice specific to your family’s situation!
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