Preparing for school tuition starts with getting educated about the different plans to save and ways to make those payments. Here are tips for funding an education for your children or grandchildren.
WASHINGTON — At Her Wealth™, we’re not only financial advisers; we’re parents. We know that one of our most gratifying financial goals is to be able to provide a great education for our children and grandchildren.
For some, this begins with kindergarten at a private school; for others, it means having enough money saved to pay for some or most of their college expenses.
In fact, we feel so strongly about educating the next generation and paying it forward that we established a Her Wealth™ Scholarship to help young women become financial advisers or CPAs. (More about that later.)
Preparing for school tuition starts with getting educated about the different plans to save and ways to make those payments. We are partial to those with additional tax benefits for parents, grandparents or other generous benefactors who would like to offset some education expenses while making the most of their tax savings.
Tuition tips for K-12
If you want your child to attend a private school, Coverdell ESA accounts are the only savings vehicle available with added tax benefits to save and pay for K-12 education expenses and are primarily intended for students age 18 or younger. These accounts are subject to a limit of $2,000 per student per year, regardless of who contributes or how many accounts there may be for each student, but the earnings in the Coverdell are tax-free when used for qualified education expenses. If you have a special-needs child, costs you incur to provide services for them may also qualify. And if you don’t use up the money for K-12, the account can be used to pay for college costs, making this an especially flexible account for families with young children.
There are income limits to consider (modified adjusted gross income — or MAGI — of $110,000 or less for a single filer, $220,000 or less for joint filers) to be eligible to contribute to the Coverdell ESA. If your income is too high to qualify, you could gift the money to someone whose income level qualifies, such as the student, and have them make the contribution instead.
Keep in mind that if the student uses a Coverdell for college expenses, it could affect any financial aid they are receiving. Like a 529 account, up to 5.64 percent of the value of the account is included in the Expected Family Contribution. If a grandparent or someone else owns the account, up to 50 percent of their withdrawal is considered income to the student when applied to the student’s tuition. So it’s a good idea to talk to a financial adviser about your intentions before setting up a Coverdell account to avoid any unintended consequences.
Tax benefits of paying tuition directly
Most people are familiar with 529 college savings plans and prepaid college plans. But many people don’t know they can pay for their grandchild’s (or any child’s) tuition directly to a qualified institution without incurring a gift tax on their contribution. This gift tax exemption applies to both K-12 and college tuition, so long as the check is written directly to the educational institution. Doing so allows you to make an additional gift of up to $14,000 ($28,000 for married couples) to that beneficiary without incurring gift tax on that gift.
For instance, you could gift up to $28,000 to a child’s education if paid directly to the university, and make an additional gift of up to $28,000 to him in the same year. And helping with tuition can be a great way to assist family members, especially those who may be going through a divorce or other financially challenging situation.
State tax savings
If you plan to put money into a 529 plan for your child or grandchild, consider the best way to take a deduction to reduce your state taxes. To know just how much state tax you may save, Savingforcollege.com has an interactive State Tax 529 Calculator.
Good news for Virginia residents: You have flexible state tax rules regarding who can take the $4,000 maximum deduction, which can be an advantage. Another advantage: Anyone age 70 or older can deduct the entire amount contributed to a 529 plan all in one year. This provides a unique opportunity for grandparents to accelerate their gifting as an estate planning technique while also benefitting the younger generation with the gift of education.
As you consider how and when to give, we encourage you to consult with your financial adviser or tax professional first. They will help you understand all your options and any tax benefits that you may be able to accrue.
It just can’t be said enough — education is the golden ticket to a more prosperous and fulfilled life. Our Her Wealth™ Scholarship is one way we are investing in the future of young women. For more information about the qualifications and to apply, please go to Her Wealth™ Scholarship and complete the online inquiry.
Dawn Doebler is senior wealth adviser and co-founder of Her Wealth™.
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