Ronald L. Tharp PC logo

12900 Preston Road, #800

Dallas, TX 75230

 

972-661-9928

 

www.rtcpa.us

2021 Tax Planning Guide

Tax Planning and College

College Application Form Education Concept

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.


SUBSCRIBE

Enter your Name and Email address to get
the newsletter delivered to your inbox.

Please include name of person that directed you to my online tax guide so I can thank them personally.


CONTACT US

Enter your Name, Email Address and a short message. We'll respond to you as soon as possible.

Ronald L Tharp, PC and LTM Marketing Specialists LLC are unrelated companies. This publication was prepared for the publication’s provider by LTM Client Marketing, an unrelated third party. Articles are not written or produced by the named representative.

The information and opinions contained in this web site are obtained from sources believed to be reliable, but their accuracy cannot be guaranteed. The publishers assume no responsibility for errors and omissions or for any damages resulting from the use of the published information. This web site is published with the understanding that it does not render legal, accounting, financial, or other professional advice. Whole or partial reproduction of this web site is forbidden without the written permission of the publisher.