Thursday, August 14, 2014

5 Tax Strategies to Pay for College Without Going Broke

Saving for college is not for the faint of heart. The cost of an education has been spiraling upward and although there are some fine 529 plans to help, the numbers can be mind-boggling.
For men and women who own their own businesses, there are a few tips that can help them create a “tax scholarship” for their children.
Owning your own business gave him the chance, he said, to take advantage of IRS rules to help pay the tuition bills.
There are also various tax credits, including the Lifetime Learning Credit, which allows parents to deduct $2,000 of educational expenses per year for dependent children.
Any strategy to help ease the tuition burden must be weighed against the tax consequences to the prospective student and the parents.
1. Hire Your Children
Giving the kids the chance to work is a good way to shift income. This helps because they probably won’t earn enough to owe taxes. The money can be set aside in an IRA or other investment vehicle. For example, if a child does office work or painting or lawn mowing on rental properties for, say $2,500 per year, the savings can build up over several years before high school graduation. Cummings says it’s important to document the job and ensure that the work is legitimate.

2. Stock Transfer

Putting stock owned by parents in the name of a child can save tax payments. Beware, Cummings says, of the so-called kiddie tax, though, that mandates children can make at most $2,000 per year in unearned income using this strategy. Anything above that is subject to the tax rate of the parents.

3. Tuition Reimbursement

Offering employees tuition reimbursement for taking college courses can lower costs because of the tax benefits associated with such programs. The IRS puts a cap of $5,250 on such a program. It’s important that all employees receive the same benefits. In other words, the children of the business owner can’t receive a benefit not available to other employees.

4. Gift or Leaseback

By making a gift of a piece of property to a child and then leasing it back, the money saved in lower tax payments can be put toward paying for college, as can any lease payments. Beware of the kiddie tax mentioned in No. 2, which applies up to age 24 unless the child is no longer a dependent of the parents.

5. Divorce Planning

For couples no longer married, but able to work on college strategies together, there are ways to maximize tax benefits. Generally, such planning involves deciding which parent claims a deduction for the child as a dependent, leaving the other free to take advantage of tax saving rules while avoiding the kiddie tax.