Friday, January 16, 2009

Tax Planning Tip #3 - Save For, and With, Education Expenses

Whether you’re saving for your children’s (or grandchildren’s) education, paying higher education expenses for them or yourself, or even paying off student loan
debt, you may be eligible for tax breaks:

529 Plans
Section 529 plans enable parents (or grandparents) to either secure current tuition rates with a prepaid tuition program or create tax-advantaged savings plans to fund college expenses. In addition:
  • For federal purposes, contributions aren’t deductible, but distributions used to pay qualified expenses are income tax free.
    (State treatment varies)
  • The plans typically offer much higher contribution limits (determined by the sponsoring state or private institution) than ESAs, and there are no income limits for contributing.
  • There generally is no beneficiary age limit for contributions or distributions.
  • 529 plans provide estate planning benefits: By filing a gift tax return, you can elect to use annual exclusions for five years all at once and make a $60,000 contribution (or a $120,000 joint contribution with your spouse).

Coverdell Education Savings Accounts (ESAs) allow more investment options than 529 plans, and they can fund expenses for elementary (including kindergarten) and secondary school as well as college. In addition:

  • Contributions aren’t deductible, but distributions used to pay qualified education expenses are income tax free.
  • The annual ESA contribution limit is only $2,000 per beneficiary, and your ability to contribute will be further limited or eliminated if your income is too high.
  • Generally, contributions can be made only for the benefit of a child under age 18, and any amounts left in the ESA when the beneficiary turns 30 must be distributed within 30 days and any earnings will be subject to tax.

Education Credits
When your kids hit college, you may be able to claim the Hope credit (up to $1,800) or the Lifetime Learning credit (up to $2,000). Here are some other considerations:

  • If your income is too high to qualify, your child may be able to claim one of the credits.
  • Both a credit and tax-free 529 plan or ESA distribution can be taken as long as the expenses paid with the nontaxable distribution aren’t used to claim the credit.

Your tax advisor can help you select the most advantageous credit mix, depending on the amount of tuition paid and the number of students in your family. Student loan interest deduction. If you’re paying off student loans, you may be able to deduct up to $2,500 of interest.

Tuesday, January 6, 2009

Tax Planning Tip #2 - Save by Giving to Charity

Donations to qualified charities are generally fully deductible. For large donations, discuss with your tax advisor both the types of assets to give and the best ways to give them. For example:

Appreciated Assets
If you donate property you’ve held more than one year, you may be able to take a charitable deduction equal to its current fair market value. Plus you’ll avoid paying tax on the long-term capital gain you’d incur if you sold the property. For instance, instead of giving cash, donate appreciated publicly traded securities.

But beware: Gifts of appreciated assets are subject to tighter deduction limits than cash contributions. Excess contributions may be carried forward for up to five years.

To benefit a charity while helping ensure your own financial future, consider funding a charitable remainder trust (CRT), which pays an annual amount to you for a given term. At the term’s end, the trust’s remaining assets pass to one or more charities. You receive an income tax deduction for the present value of the amount that will go to charity (the remainder interest). And you can contribute appreciated assets and avoid paying capital gains tax on their sale.