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2022 Tax Planning Guide

Tax Planning and College

Tax Planning and College

Owners of 529 accounts may now make tax-free withdrawals of up to $10,000 from these plans for the purposes of paying down qualified student loans. This $10,000 is a lifetime limit that applies to the 529 plan beneficiary and each of his or her siblings. So, a parent with three children can make a tax-free withdrawal of up to $30,000 total—one for each child. Any interest paid down with a 529 plan is ineligible for the student loan interest deduction.

You can also use 529 plans to pay qualified apprenticeship program costs. The apprenticeship program must be registered with and certified by the U.S. Department of Labor.

Additionally, the Tax Cuts and Jobs Act extended the definition of qualified 529 plan distributions to include some K-12 educational costs—up to $10,000 per year, beginning in 2017. These include tuition, books, fees, and computers. You can withdraw up to $10,000 annually to pay for elementary or secondary education costs, provided your state plan allows. Plus, the higher withdrawal allowances for higher education expenses still apply.

The Coverdell Education Savings Account (ESA) remains unchanged, with a $2,000 annual contribution limit per student. You qualify to make a full nondeductible contribution if you file jointly, but the limit is phased out at a modified AGI of $190,000–$220,000. Limits for singles are half of those for joint filers. Earnings are tax-deferred and qualified withdrawals are tax-free. You have until the April 2022 tax filing deadline to make a Coverdell ESA contribution for 2021.

Reduce your taxable estate by putting five years’ worth of gifts into a 529 plan for a loved one’s college education. Maximize your gift by giving up to the maximum annual tax-free gift limit of $16,000 each year for five years per donor per recipient; the plan’s assets then grow tax-deferred and qualified withdrawals are tax-free.

You may have a choice of taking a Lifetime Learning Tax Credit (up to $2,000) or an American Opportunity Tax Credit (up to $2,500 per student) for qualified education expenses, but you can’t take both in the same year for the same student. The deduction for qualified tuition expenses expired at the end of 2020 but is replaced with increased income phaseout thresholds on the Lifetime Learning Tax Credit.

Stipend payments for graduate and doctoral students are ‘earned income’ for the purposes of determining allowable IRA contributions. If you or your spouse receives such a stipend; you may be able to contribute more toward a traditional or Roth IRA.

The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) facilitate custodial accounts set up for the benefit of minors. While they don’t have restrictions like qualified education accounts, they feature two distinct disadvantages:

  • Beneficiaries who have reached the age of majority will own the account assets and can do what they want with the funds.

  • Students are expected to contribute a greater percentage of assets than parents when paying for education expenses.

Borrowers have a few ways to see their student loans forgiven, cancelled, or discharged for working in public service and other sectors. Talk to your tax professional to learn if any apply to your situation.

For those taxpayers paying off their student loans and who qualify by income, may deduct from their AGI up to $2,500 in qualified education loan interest. This deduction phases out for individuals with a modified AGI greater than $70,000.


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