{"id":8277,"date":"2018-08-14T13:25:48","date_gmt":"2018-08-14T18:25:48","guid":{"rendered":"https:\/\/digitalblogs.wpengine.com\/?p=8277"},"modified":"2019-09-30T18:53:35","modified_gmt":"2019-09-30T23:53:35","slug":"how-to-pay-for-college-with-tax-deductible-dollars","status":"publish","type":"post","link":"https:\/\/www.cainwatters.com\/digitalblogs\/how-to-pay-for-college-with-tax-deductible-dollars\/","title":{"rendered":"How to pay for college with tax-deductible dollars"},"content":{"rendered":"

The cost of higher education is increasing at an average of 3.1% for tuition and fees and 3.1% for room and board per year according to The College Board<\/a><\/span><\/span>. For private colleges, this increase could be even higher at 3.6% for tuition and fees.<\/p>\n

There is mixed advice on what type of account (529 college savings plans, Roth IRAs, etc.) should be used for saving for college; however, with the new tax law there are changes that now offer the opportunity to pay for college with tax-deductible dollars.<\/p>\n

To take advantage of it, CWA Partner Toni Lee advises her clients to reevaluate the way they are paying for their students\u2019 higher education costs by looking at the child\u2019s earned income, rather than their own.<\/p>\n

\u201cEmployment of your children within your business,\u201d Toni says, \u201ccan provide tax savings opportunities for the entire family unit.\u201d<\/p>\n

Considerations: <\/u><\/p>\n

Child\u2019s Earned Income:<\/strong> Your child\u2019s earned income (wages & salaries) is taxed at their reduced rate. This means that their earnings up to $12,000 annually will be tax-free since they are offset by the standard deduction of $12,000 under the new tax law. Income in excess of this amount is taxed at 10% up to $9,525 and 12% up to $38,700.<\/p>\n

Kiddie Tax: <\/strong>The Kiddie Tax<\/a><\/span><\/span> applies to a child\u2019s unearned income (i.e. interest, dividends, capital gains, etc.) received under the age of 19, or 23 for full-time college students. Under the new tax law, this type of income is now taxed at the rate paid by trusts and estates, rather than at the parent\u2019s tax rate used in previous years.<\/p>\n

The above Kiddie Tax rules do not apply if the child provides over half of his own support from earned income (salaries and wages). Meaning, if the child\u2019s earned income is at least half of his college cost, both earned and unearned income is taxed at the child\u2019s low rate.<\/p>\n

Capital Gains & Dividends: <\/strong>If a doctor were to sell any appreciated stocks, the gain would be taxed at the doctor\u2019s tax rate and include an additional federal capital gains tax should they already be in the highest tax bracket.<\/p>\n

Should the doctor gift the appreciated stock to the college-aged student, once sold the gains would then be taxed at the student\u2019s low rate. There are limitations on the amount that can be gifted per child, as well as other rules regarding married doctors. It\u2019s best to consult a CPA to guide you through this process.<\/p>\n

American Opportunity Tax Credit (AOTC): <\/strong>Now that the child is paying for their college costs with their own income, they are now eligible to claim educational tax credits. The American Opportunity Tax Credit<\/a><\/span> is a credit for qualified education expenses paid for the first four years of college, with a maximum annual credit of $2,500 per student.<\/p>\n

Most doctors are not able to claim this credit as they are phased out as income reaches $80,000 for singles, and $160,000 for married couples.<\/p>\n

In conclusion, Toni reminds us that it\u2019s important to stay abreast of this topic, \u201cStay tuned for future changes. The Trump administration is proposing \u2018Tax Cut 2.0\u2019 which includes additional changes and opportunities for educational planning.\u201d<\/p>\n

With a strategic tax plan, the opportunity for savings is there. As you are preparing to write a large check this semester, reconsider your approach and let your CPA craft a plan to help your money work for both you and your child. If you need help to get started, contact CWA<\/a><\/span><\/span> for a complimentary consultation.<\/p>\n","protected":false},"excerpt":{"rendered":"

The cost of higher education is increasing at an average of 3.1% for tuition and fees and 3.1% for room and board per year according to The College Board. For private colleges, this increase could be even higher at 3.6% for tuition and fees. There is mixed advice on what type of account (529 college […]<\/p>\n","protected":false},"author":7,"featured_media":8282,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[21],"tags":[],"ppma_author":[48],"class_list":["post-8277","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-tax-news"],"acf":[],"yoast_head":"\nHow to pay for your child's college with tax-deductible dollars<\/title>\n<meta name=\"description\" content=\"Learn how to pay for college tuition with tax-deductible dollars. 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