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With your kid off to freshman orientation, hefty bills are starting to roll in. Too affluent to qualify for financial aid? Unfortunately, shifting assets into your child's name no longer saves money, and you can take a full education tax credit only if you and your spouse make less than $96,000. But Jim Van Grevenholf, a senior tax analyst for Thomson Reuters, says there are still ways to minimize the IRS' bite.
Spend 529 or Coverdell money on room and board first. That's because funds you withdraw from a 529 plan or a Coverdell Education Savings Account are tax-free if you spend them on most school-related expenses, including room and board. If you still face a gap, you may be able to claim a partial tax credit for other savings or loans you put toward college--but only if the money is spent on tuition and fees.
Consider skipping a personal exemption. If more than half of your kid's school and living costs are paid from assests held in his name--and you're too rich for an education credit--you might bypass an exemption for him on your taxes. The exemption, $3,500 in 2008, begins to phase out once a couple earns $239,950 anyway. Junior can then claim a credit to offset his tax bill if it's hefty. (He'll owe you one.)
Think about opening a 529 savings plan now. A 529 may make sense even if your child is already off to college. Almost all education-related tax credits and breaks are subject to income caps; 529s, however, are not. Interest earned from a money-market fund or bond fund you have in the plan will escape income taxes (the rate is as much as 35% for high earners).
Posted On
11/26/2008 6:16:09 PM
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