Help With Education Costs

Virtually all taxpayers can now get help to pay for education costs.

Students and their parents can capitalize on a number of different education benefits. For example, the maximum amount that can be contributed to a Coverdell Education Savings Account (formerly an Education IRA) each year is $2,000. Any family member with adjusted gross income below $190,000 in a joint return or $95,000 in a single return can contribute toward the $2,000 maximum annual addition to a Coverdell account, where the contribution will grow, tax-deferred, until withdrawn for any of a liberal list of education costs — even private elementary and secondary tuition. At higher income levels, the maximum contribution is reduced.

State sponsored prepaid tuition plans (Section 529 plans) offer an attractive way to accumulate money to pay higher education costs. Both public and private institutions sponsor tuition savings plans. Parents, Grandparents, or other interested parties typically contribute up to $11,000 per year to such plans where income accumulates tax-free. Funds withdrawn from Section 529 plans are totally free from federal income tax if they are used to pay qualified higher education expenses.

Hope and Lifetime Learning credits are also available and several funding sources can be coordinated in order to pay as many costs as possible with tax favored dollars. An education expense deduction, for up to $3,000 of education expenses that are not paid from a Section 529 plan or a Coverdell Account and don’t qualify for the Hope or Lifetime credit, is available for taxpayers with modest incomes. That deduction is available whether the taxpayer itemizes deductions or not, but begins to phase out at adjusted gross income levels in excess of $43,000 ($87,000 on a joint return).

Planning education funding for yourself, your children, or your grandchildren may involve coordinating five tax law provisions . . . six, if you count the tax free redemption of Series E bonds to pay higher education costs . . . and you might want some help. We have studied these provisions and are prepared to assist you. Just give us a call to arrange an appointment.