Financing College Expenses

NEWSLETTER ARCHIVE	December, 2003


		Now that your holiday bills are coming in and your finances are taking a major blow, we thought it might be a good time to bring up a timely subject - financing your children's college tuition. As your tax and financial advisors, we're often faced with the unrewarding task of being the bearer of discouraging financial news, but we always try to soften the blows somewhat with good, sound strategies that can help you prepare as best you can. There are actually a number of tax and investment strategies you can use to help finance college expenses and the Relief and Reconciliation Act has greatly enhanced this area. We'll outline below some of the best options available. Hope Credit A tax credit of up to $1,500 per student is available for the first two years of college education. The tax credit is 100% of the first $1,000 of any tuition and eligible class fees paid, and 50% of the second $1,000 in tuition and class fees paid (maximum of $1,500). Athletic fees, housing costs, student activity fees and books are not eligible expenses for the Hope or Lifetime learning credits. The credit phases out for married taxpayers with adjusted gross income between $80,000 and $100,000. For single taxpayers and others not filing a joint tax return, the adjusted gross income phase out is between $40,000 and $50,000. Lifetime Learning Credit A tax credit of up to $1,000 per student is available for any college tuition paid during a year that the Hope credit is not claimed. The credit is 20% of any tuition or class fees paid up to $5,000 (for a total allowable credit of $1,000). The lifetime learning credit has the same adjusted gross income and eligible expense limitations as the Hope credit. Financial Aid Financial aid planning for college is often more important than tax planning. Steps can be taken to increase your child's chances of receiving grants or a subsidized Stafford loan by decreasing the child's income and assets and if possible your income and assets. This should be done the year before you apply for loans or grants. Some specific financial-aid strategies are: shift investment assets from your child to you. The student's assets are a much bigger factor in the financial aid formula than the parents assets move investment assets that produce interest and dividends into growth investments if you control an S corporation or C corporation, shift personal assets into the corporation (please consult with us before doing this - you don't want to shift appreciated assets into your corporation) if you control a C corporation, reduce your salary and keep the money in the corporation until after your child leaves school have two or more family members attend college at the same time Series EE Savings Bonds If you own Series EE Savings Bonds, you may be able to redeem the bonds tax-free when you use the money to pay for college tuition in the year of redemption. However, any tuition costs that are used in the calculation of the Hope or lifetime learning credits cannot be included in determining whether the Series EE bond redemption is tax-free. Education IRA This program has been expanded tremendously under the new law. Education IRAs will now cover not only the costs of higher education, but also the costs of public and private elementary and secondary education. Beginning in 2002, the annual contribution limit to education IRAs rose from $500 to $2,000 and contributions are now allowable from corporations, tax-exempt organizations and other entities. Contributions will also be permitted all the way until the filing date of the return (April 15th of the following year) and the adjusted gross income ceiling for allowable contributions has been raised from the present $150,000 to $160,000 phase-out range to $190,000 to $220,000. Qualified Tuition Programs You may want to use a qualified tuition program if your state offers one. A qualified tuition program allows you to purchase future tuition in any of your state's colleges at today's prices. The advantages are that you will avoid any "tuition inflation" which has historically been much higher than regular inflation, your investment will grow tax-free until your child begins college, and you will still be eligible for the Hope and lifetime learning credits. However, if your child doesn't go to college or decides to go to college in another state, you may just get back your original investment without any of the accumulated earnings or with only partial earnings. Depending on which state you live in, this can be one of the best college investment strategies. Under the 2001 Tax Relief Act, private institutions of post-secondary learning are now able to sponsor qualified tuition programs whereby taxpayers may pre-pay tuition costs. Under prior law, qualified tuition plans had to be state-sponsored and could cover only higher education costs. Distributions from qualified tuition programs are excludable from gross income if made after December 31, 2001 from state-sponsored plans or December 31, 2003 from non-state programs. Tuition Deduction You are entitled to a deduction for qualified tuition costs of $3,000 provided your adjusted gross income is below $65,000 ($130,000 joint). In 2004 and 2005, the deduction will increase to $4,000. Also, in those years, you will be allowed a $2,000 deduction if your income is between $65,000 and $80,000 ($130,000 and $160,000 joint). The college tuition deduction ends after 2005 and cannot be claimed in the same year as a HOPE or Lifetime Learning credit for the same student.. Gifting Appreciated Investments If you have appreciated investments, you may want to give them to your child to sell and use for college. If your child is in the 15% tax bracket, he or she will only pay a 10% tax on the gain instead of the 20% tax you would pay if you sold the investment and gave the child the cash. However, if your child is going to qualify for financial aid, giving them investments may disqualify them from receiving the financial aid.

	This Information Is Not Intended For Use Without Professional Advice Disclaimer