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Daniel R. Cuddy, CPA, CFP®

Personal Financial Representative

 

Cuddy Financial Services

7 William Street

Auburn, NY 13021

 

Phone:  315-252-3600

Fax:      315-252-3625

 

Email: dcuddy@cuddyfinancial.com

2023 Tax Planning Guide

Tax Planning and College

Tax Planning and College

SECTION 529 PLANS
In the past few years, 529 plans have undergone some changes that make them more versatile. You may make tax-free withdrawals of up to $10,000 (lifetime limit per beneficiary) from these plans to pay down qualified student loans of the beneficiary and any siblings. 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 up to $10,000 annually to include some K-12 educational costs, such as tuition, books, fees and computers. You can also withdraw up to $10,000 per year to pay for elementary or secondary education costs, if your state plan allows. Of course, you can still withdraw larger amounts for higher education costs.


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 2023 tax filing deadline to make a Coverdell ESA contribution for 2022.


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. Maximize your gift by giving up to the maximum annual tax-free gift limit of $17,000 each year for five years per donor per recipient. Know, however, that you can’t make another gift to the same 529 plan for the five-year period.


EDUCATION TAX CREDITS
Students may take advantage of the Lifetime Learning Tax Credit (up to $2,000 per student, per year) or the American Opportunity Tax Credit (up to $2,500 per student, per year), subject to income limits that are higher for the Lifetime Learning Credit. You cannot take both credits in the same year, nor be declared a dependent by someone else.


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.


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, but they also 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
In 2022, President Biden announced a federal student loan forgiveness program that discharges up to $20,000 in loans to Pell Grant recipients and up to $10,000 to other borrowers, subject to income limits. However, the program has been held up by various court challenges, so its future is uncertain.


Borrowers, however, have other ways to see their student loans forgiven, cancelled 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 adjusted gross income in qualified education loan interest. This deduction phases out between a modified adjusted gross income of $70,000-$85,000 for individuals and $140,000-$170,000 for married taxpayers filing jointly.


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