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Saving Or Paying For College Can Be Costly

(posted: May 9th, 2017)

Let's begin with 529 college savings plans.

There's no federal tax deduction for payins.

Contributions are treated as gifts to the beneficiary, but with a special twist. You can shelter from gift tax up to $70,000 in contributions per beneficiary ($140,000 if your spouse joins in) in a single year. If you contribute the maximum, you use up your annual gift tax exclusion for the current and four subsequent years. The gift isn't irrevocable, but the money is out of your estate for estate tax purposes. Many states let residents deduct all or a portion of payins made to their state's 529.

Tax-deferred earnings are tax-free when used for postsecondary education.

Eligible expenses include the cost of tuition, books, supplies, fees and computers. Room and board also qualify if the student is enrolled in the school at least half-time.

Coverdell education savings accounts are another option.

As with 529 plans, distributions from them are tax-free if the funds are used for education expenses.

Annual payins are capped at $2,000.

Full contributions can be made by marrieds with adjusted gross incomes up to $190,000 and $95,000 for singes. You can set up both a Coverdell and a 529 college savings plan for the same child.

If you have savings bonds, think about using them to pay for college.

Generally, interest on savings bonds must be reported as income on the federal return in the year the instruments mature or when they are redeemed, whichever is earlier.

Interest on EE and I bonds used to pay for education may be tax-free, provided certain requirements are met.

The bonds must have been purchased after 1989 by taxpayers who were at least 24 in the month before they bought the bonds. The bonds must be redeemed to pay for college or graduate school tuition and fees for the taxpayer, spouse or dependent. Vocational schools also qualify for the break. Room-and-board costs aren't eligible expenses for this purpose. Additionally, the bonds are required to be in the taxpayer's name, not the name of the child.

The exclusion is subject to income limits.

For 2017, it begins to phase out for couples with modified adjusted gross income over $117,250 and $78,150 for singles. The tax break disappears when modified AGI hits $147,250 and $93,150, respectively.

Interest on U.S. savings bond is exempt from state and local income taxes.

Relatives or others can pay tuition directly to a school, free of gift tax.

This payment doesn't count against the $14,000-per-donee annual gift tax exclusion or the lifetime estate tax exemption. It can be a nice present for a college student.


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