Posted on February 23, 2011May 31, 2016 by Jan Roberg

Tax Tips for Families with High School Aged Children

If you’ve got kids in high school, you know how expensive it can be—food, clothes, car insurance… And of course, there’s that big expense coming up; college. A little strategic planning right now could help you with your college expenses in the future. Let’s take a look.

Senior year: If your child is already a senior, you’ll be completing the FAFSA application soon. You financial picture for the college process is already done so there’s not much you can do now. Even if you don’t think that you’ll qualify for financial aid, you should complete the FAFSA anyway. Should your financial situation dramatically change, you may be able to renegotiate your aid with the school. You won’t be able to without a completed FAFSA application on file.

Junior year: This is the most important year for you as far as tax strategy. If your child is a high school junior right now, then your 2011 income tax return is what will be used to determine your future financial aid. It’s really important to think through any actions that may affect your income. For example cashing out an IRA or 401(k) right now would increase your taxable income, and because of that would reduce your potential financial aid. Cashing out stock for a capital gain—same thing. On the other hand, cashing out stock for a capital loss would reduce your income. Be sure to take advantage of any programs that would reduce your taxable income such as flexible spending accounts and adding to your 401(k) if possible.

Sophomore year: This is the year before you’re working on the FAFSA. If you anticipate that you’ll need to sell stocks, cash out 401(k)s or anything else that would raise your income, this is the year to do it in. While the parent of a junior would want to defer income, if your child’s a sophomore you’d rather claim the income during this year. This is a little counter-intuitive. A tax person is always going to advise deferring income, but this is the one year where that’s not the case because you really want to keep that junior year income down.

Freshman year: Welcome to high school. It’s hard to think about college when you’re still trying to adjust to Friday night football games and the concept of your child riding in a car with other kids. In a perfect world, you’ve been saving for college since pre-school and you’re all set. Unfortunately, the world isn’t perfect and life gets in the way. Now’s the time to really think about money. How are you going to pay for your child’s education. While your student might not have a clue yet about what school to attend, you need to start thinking about it. How much can you really expect to contribute to tuition? How are you going to make up the difference? You don’t need to solve all these issues now, but you need to do some serious thinking now, before you get to graduation without a plan.

Posted on January 13, 2011May 31, 2016 by Jan Roberg

Tax Time Savings Bonds

Grandparents can buy US Savings bonds for their grandchildren.

Grandchildren are good reasons to buy US Savings bonds.

Did you know that you buy US Savings Bonds with your income tax refund? You can buy savings bonds for yourself or for other people, like your grandchildren for example. Last year, you could only purchase a bond for yourself.

How do you do it? It’s really easy. If you claim a refund on your 1040, you use form 8888. It’s the Allocation of Refund form (it includes Savings Bond Purchases) to split your refund. The bonds start at $50 and you can purchase more in increments of $25 up to $5,000 worth if you want to. Any money that you don’t use for purchasing bonds will be direct deposited into your bank account.

For example: let’s say that you will get an $800 refund. You want $100 in bonds to go to each of your two grandchildren John Jones and Mary Smith. You will fill out the paperwork with their names on the form (you don’t need their social security numbers) and the remaining $600 will be direct deposited into your bank account. The US Savings Bonds will be mailed directly to your home in about 5 weeks.

The bonds will earn interest for 30 years and are tied to inflation. It’s a safe investment backed by the United States Government. They’re not just for saving for college. This could be a retirement savings vehicle if you want it to be.

You can cash the bond in after one year at most banks or credit unions if you need to. You will need to hold the bond for at least five years if you don’t want to lose the last three months of your interest though. The current interest rate is .74% and it adjusts for inflation every six months.

The best part, there’s no fee for investing in U.S. Savings Bonds.

If you’ve been thinking that you need to start saving and you just haven’t done it yet, this is a great opportunity.

Posted on July 8, 2010August 31, 2019 by Jan Roberg

College Tax Credit

Students heading back to school may qualify for up to $2500 in tax credits.

The American Opportunity Tax Credit can be worth up to $2,500 to help pay for tuition.

Updated August 2019

I’ve written in the past about saving for college, but what about if you’ve got that tuition payment coming due this fall? Here are a few tips to help you maximize your tax benefits.

The biggest tax advantage for tuition payers is the American Opportunity Credit which will still be available for 2019. It’s worth up to $2,500 in tax credits. I said tax credit, not a tax deduction! That means that $2500 is written off of your taxes! And for some people, up to $1000 of that is a refundable tax.

What’s a refundable tax? That means, even if you didn’t owe $2500 in taxes, you can still get up to $1000 back from the IRS. How cool is that?

Now the American Opportunity Tax Credit starts to phase out if your Modified Adjusted Gross Income (MAGI) is $80,000 ($160K if married filing jointly) and is completely erased by the time your income reaches $90,000 ($180K for MFJ.) If your income is near, or slightly over, the phaseout limit there are some things you can do now to keep your income in line. (MAGI for most people is their regular income.)

First, the easy thing is to reduce your taxable income by contributing (or increasing the contribution) to your company’s 401(k). Many companies have their benefit sign ups in November so you may have already missed the boat. But some companies are more flexible so it’s worth checking out. The maximum you can contribute to your 401K plan in 2019 is $19,000 (or $25,000 if you’re over 50.) Of course, you’re also trying to pay tuition and perhaps eat once in awhile, so reducing you income by $25,000 might not be an option.

In addition to 401(k) plans, some companies have exempt cafeteria plans for health care or day care. If you can take advantage of those programs it could be helpful in reducing your MAGI. If you know you’ll spend the dollars anyway, why not remove that money from your taxable income? (Frankly, that’s a good idea whether you’re tying to qualify for the college tax credit or not!)

If your income is clearly too high to qualify for the American Opportunity Tax Credit, it may make sense to not claim your student as a dependent and have her put the credit onto her taxes. You’ll need to play with it. The credit isn’t as good when a dependent student claims it herself – she’ll lose the refundable part – so if she doesn’t have enough income for a tax liability, it’s not going to be worth it.

So when paying tuition, how do you get the biggest bang for the buck? If you have a student whose tuition will easily exceed the $4000 required to take full advantage of the tax credit, you don’t really need to think about strategy here. The form you get from the college will show you paid $X dollars for tuition and you won’t have to think about qualifying expenses for tax credits. The form is called a 1098T form. For 2019, you absolutely must have that form to qualify for the American Opportunity Tax Credit. Here’s the thing – your college aged student is over 18, the school is going to give the form to her. You have to get it from your student to file your taxes.

If you’re lucky enough to get good scholarships or an inexpensive school, you’re going to need to be able to prove you spent money on qualified expenses. Tuition, fees, and books count. If your tuition is only $1500, it’s important to keep those receipts for books and campus fees as well to add to your tuition expense. Room and board won’t count.

{A note about books: if you have an older student and couldn’t claim books in the past because of the restrictive rules, it’s changed for this credit. Now, your student can buy books from a used bookstore, Amazon.com or any other place where student texts are sold, and still use the receipt towards this credit.}

On the flip side, if you’ve got a student at an expensive school and you’re well over the $4,000 threshold, you might not want to pay the second semester tuition before January, especially if you have a student thinking about taking a year off. Pay that next year’s tuition in January so you can spread out the tax credit.

With the American Opportunity Credit, you get a 100% tax credit on the first $2000 of tuition paid. That’s a dollar for dollar tax credit. After that, you get a credit of 25% of the next $2000 of tuition paid. The first $2000 worth of tuition is more valuable than the next. Still, a 25% tax credit is nothing to sneeze at either. Also, if you pay tuition in 2019 for classes that will be taken within the first three months of 2020, that counts towards the credit too. Come December, if you haven’t already exceeded the $4,000 tuition expense amount, it may make sense to pay your next semester a little early.

Which students qualify for this credit? It’s available to students who are in their first four years of college, they must be at least a half time student, they have to be at a qualified institution, and they cannot have a felony drug conviction.

If you’d like more information on the American Opportunity Credit, or other education credits, IRS publication 970 has answers. (It’s 83 pages long, but it does have almost everything in there.) You can access it here: IRS College Tax Credit

One final thing, because everybody asks me this: if you pay for tuition with a loan, it still counts as you paying tuition. You can still claim the credit.

Posted on July 2, 2010August 8, 2017 by Jan Roberg

Saving for College

New parents always want to start saving for their child’s college education. People often ask me what’s the best way to do that? To be honest, for different circumstances I give different answers, but these are some of my standard recommendations.

First, before you put any money into a college savings plan, make sure that you have enough money in your emergency savings fund. You should have enough money in savings to cover at least three months worth of expenses (I prefer to see six.) If you lose your job or have some other financial emergency, putting food on the table and a roof over your child’s head ranks over having money for college. People fight with me over that, they say, “No, I want to have money I won’t spend.” Bingo, that’s why it’s called savings. Think of your savings account as your college fund, it’s just step one.

Once you’ve got that established, I like to see money in a Roth IRA. Once again, this isn’t a college fund, but it makes sense financially. First, a Roth IRA can be used to pay for college expenses penalty free. Also, because you get no tax break for contributing to a Roth, you pay no income tax on the money when taking it out. And it grows tax free, so a Roth is a good vehicle for college savings. Secondly, suppose your child decides not to attend college or manages to get a free ride at a University? Well, then you’ve just got more retirement money sitting around for you. (Sweet.) Third, let’s say you’re not financially able to pay for all of Junior’s tuition and you need to apply for financial aid. Money in a child’s 529 plan is considered to be fully available to pay for college. Money in an IRA is not. Your financial aid package will be better if your funds are in a Roth.

One more point in favor of paying towards retirement before paying for college. When push comes to shove, if there is no money for college, a motivated kid can get a loan for school. But if you’re 70 years old and your only income is your Social Security check, do you honestly think a bank will give you $100,000 to help you with your retirement expenses? It’s not going to happen. It’s kind of like the airplance emergency demonstration, you need to put on your own oxygen mask first, before you help someone else.

So let’s say you have all your bases covered, you’ve got savings and you’ve got retirement money, then what? Now we can start with the 529 plans. Although there are no federal tax benefits for 529 plan contributions, they do grow tax free. Also, many states exempt a portion of your income from tax when you contribute to their state plan. For example, in Missouri, you can contribute $8,000 a year tax free to a 529 plan. If you’re married, both spouses can contribute– giving you a $16,000 tax deduction. Here’s a link to their website:

http://www.treasurer.mo.gov/Most.asp

The most important thing about saving for college is to start. You won’t believe how fast your kids grow up until they’re already grown. By then it’s too late. Good luck.