Tax Incentives Help Families Afford College
Higher education and tax incentives are a winning combination
Benefiting from federal tax incentives while obtaining a college education is a win-win situation. While many are unaware of how to go about this, wealth-education information is everywhere and should be carefully studied. With diligent research and a commitment to learning as much as possible, parents and students are often surprised to discover that tax breaks and college savings often go hand in hand.
The following are but a few of the programs, which offer tax incentives and other savings while helping families afford the cost of college without having to obtain personal loans:
US savings bonds
If purchased by someone 24 years old or older after 1989, redeeming EE and I savings bonds may be done so without paying taxes on them if the owners of the bonds, their children or a spouse are using the money to help pay for college. However, income limits apply to such savings. For instance, in 2010, those who earn between $70,000 per year and $85,000 per year are excluded. For married couples who file a joint tax return, this income limit is between the amounts of approximately $105,100 per year and $135,000 per year. It should further be noted that these income limits are subject to increase with each year. Consulting with a qualified investment advisor can help a person determine if and how these limits may affect them.
Hope Scholarship Credit
Also known as the American Opportunity Tax Credit, the Hope Scholarship Credit allows a parent to claim a one-hundred percent credit up to $2,500 annually per child for as many as four years per student. This credit is only allowed if a student is enrolled at least half-time in a degree program and the student must be in their first four years of undergraduate study in order to qualify. Income guidelines do apply, therefore it is recommended that a professional be consulted before applying for a Hope Scholarship Credit.
Coverdell Education Savings Account
This college savings program was once known as an Education IRA. Now, commonly referred to by the acronym, ESA, earnings on these education savings accounts be tax-free if they are used for college costs. Up to $2,000 can be contributed to this account per child and these accounts can actually be used to fund a student’s precollege education, such as private school tuition for elementary and secondary schooling.
Individual Retirement Accounts (IRAs)
When money is withdrawn early from a traditional or a Roth IRA for the purpose of paying for college, penalties for doing so are waived. This is true whether the student is the investor, the investor’s spouse, a child or the investor’s grandchild. While taxes are still likely to be due on such a withdrawal, the penalties normally assessed on such are not, which can amount to a significant savings to help pay for college.
Consider all the options
Being aware of tax incentives that will help offset the cost of college makes affording an education easier than ever. By asking a qualified tax professional and investigating all available options, families find great reward in the savings they discover. While a college education can be expensive and some find themselves taking out personal loans in order to pay tuition, other options are available and each should be considered carefully.