Education Planning

Section 529 Plans

Essentially, a 529 plan allows you to invest money with tax-deferred earnings for a child’s higher education. When the time comes, you can make tax-free withdrawals to pay qualified college expenses, such as tuition, room and board, required fees, books, supplies, and computers, for the student.

Also, up to $10,000 (lifetime limit per beneficiary) from these plans to pay qualified student loans of the beneficiary and any siblings. You can also use 529 plans to pay qualified apprenticeship program costs. The U.S. Department of Labor must register and certify the apprenticeship program. Additionally, qualified 529 plan distributions of up to $10,000 annually may be used to pay some K-12 educational costs, such as tuition, books, fees, and computers, if your state allows.

Reduce your taxable estate by front-loading five years’ worth of gifts into a 529 plan in one year for a loved one’s college education. You can give up to the maximum annual tax-free gift limit of $18,000 each year for five years per donor per recipient. Once your gift is completed, you can’t make another gift to the same 529 plan for the five-year period.

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 that. Earnings are tax-deferred, and qualified withdrawals are tax-free. You have until the April 2025 tax filing deadline to make a Coverdell ESA contribution for 2024.

IRA Contributions for Graduate and Doctoral Students

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. Remember that you can’t contribute more to an IRA than you have in earned income and other rules apply.

Education Tax Credits

The American Opportunity Credit is for undergraduate expenses (up to $2,500 per student per year), while the Lifetime Learning Credit (up to $2,000 per student per year) is more flexible. You cannot claim both credits in the same tax year for the same student.

Custodial Accounts

The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are custodial accounts set up for the benefit of minors. They don’t have restrictions or contribution limits as 529 plans and Coverdell Accounts do, but they aren’t tax advantaged.

The utility of using these accounts to fund college costs is questionable because assets are transferred to beneficiaries at the age of majority in their states when they can spend them in whatever way they want. Custodial account assets can also negatively impact potential financial aid for college because students are expected to contribute a greater percentage of assets than parents.

Student Loans

As we went to press, a federal student loan forgiveness program President Biden had announced was up in the air with various court challenges. Borrowers, however, have other ways to see their student loans forgiven, canceled, or discharged, including working in public service and other sectors. Talk to your tax professional to learn if any apply to your situation.

Student loan holders who qualify by income may also deduct up to $2,500 from their AGI in qualified education loan interest. This deduction phases out between a MAGI of $85,000—$95,000 for individuals and $165,000—$195,000 for married taxpayers filing jointly. Parents who help a child pay loans generally can’t take the write-off. But if the child meets the MAGI qualifications and isn’t eligible to be claimed as a dependent, they may claim the interest deduction.

Also, if your employer offers a qualified educational assistance program, you may be able to use it to pay down up to $5,250 this year with the benefits excluded from your wages for income-tax purposes.