Tax Planning and College

SECTION 529 PLANS

529 plan account owners 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. The withdrawal allowances for higher education expenses still apply.

COVERDELL ESA

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 2021 tax filing deadline to make a Coverdell ESA contribution for 2020.

EDUCATION TAX CREDITS

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. 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.
The credit is deducted from your taxes owed, not from your income.

GRADUATE AND DOCTORAL STUDENTS AND IRA CONTRIBUTIONS

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 towards a traditional or Roth IRA.

CUSTODIAL ACCOUNTS

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 can do what they want with the account once reaching the age of majority because they’ll own the assets. Also, students are expected to contribute a greater percentage of assets than parents when paying for education expenses.

STUDENT LOANS

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, they 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.

NOTE: President Biden and the Department of Education recently extended student loan forbearance until Sept 30, 2021.