TAX SMARTS: Tax Free Savings Options For College

By Steve Julal

The cost of college is going up. Here are the most current tax policies, tips and exceptions related to Qualified Tuition Programs.

Income Tax

Contributions made by an account owner or other contributor are not tax deductible for federal income tax purposes, but earnings on contributions do grow tax-free while in the program. Distributions from the fund are tax-free to the extent used for qualified higher education expenses while distributions used otherwise are taxable to the extent of the portion which represents earnings. A distribution may be tax-free even though the student is claiming an American Opportunity Credit (formerly the Hope Credit) or Lifetime Learning Credit, or tax-free treatment for a Coverdell ESA distribution, provided the programs aren’t covering the same specific expenses. Distribution for a purpose other than qualified education is taxable to the one getting the distribution. In addition, a 10 percent penalty must be imposed on the taxable portion of the distribution, which is comparable to the 10 percent penalty in Coverdell ESAs. The account owner may change the beneficiary designation from one to another in the same family. Funds in the account roll over tax-free for the benefit of the new beneficiary.

Tip: In 2009, the American Recovery and Reinvestment Act added expenses for computer technology/equipment or Internet access to the list of qualifying expenses. Software designed for sports, games, or hobbies does not qualify, unless it is predominantly educational in nature. In general, however, expenses for computer technology are not considered qualified expenses.

Gift Tax

For gift tax purposes, contributions are treated as completed gifts even though the account owner has the right to withdraw them. Thus they qualify for the up-to-$14,000 annual gift tax exclusion in 2016 (same as 2015). One contributing more than $14,000 may elect to treat the gift as made in equal installments over the year of the gift and the following four years so that up to $56,000 can be given tax-free in the first year.

However, a rollover from one beneficiary to another in a younger generation is treated as a gift from the first beneficiary, an odd result for an act the “giver” may have had nothing to do with.

Read the rest: https://atltribune.pageflip.site/editions/AT65563#page/21 

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