How to Write-off College Expenses and Save for Children’s Education
More than ever parents are turning to college planning professionals to assist them with the many drawbacks of conventional ways of paying for college tuition. Let's take a look at a few of them.
Those with Kids in College NOW! You have 4 Options and yes, I feel your urgency and you obviously are the group that needs the most attention.
American Opportunity Credit. This credit, originally created under the American Recovery and Reinvestment Act is still available even after the Tax Cuts and Jobs Act. The credit can be up to $2,500 per eligible student and is available for the first four years of post secondary education at an eligible institution. Forty percent of this credit is refundable, which means that you may be able to receive up to $1,000, even if you don’t owe any taxes. Qualified expenses include tuition and fees, course-related books, supplies, and equipment. Bad news: The credit begins to phase out for single taxpayers who have adjusted gross income between $80,000 and $90,000 and for joint tax filers when adjusted gross income is between $160,000 and $180,000. TAKE AWAY- This applies to your new college student while in undergrad, but only if your income is in the right range.
Lifetime Learning Credit. This credit IS NOT refundable, but it’s a credit of up to $2,000 and there is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student. More specifically, the amount of the credit is 20 percent of the first $10,000 of qualified education expenses or a maximum of $2,000 per return. Bad news: The credit begins to phase out for single taxpayers who have adjusted gross income between $56,000 and $66,000 and for joint tax filers when adjusted gross income is between $112,000 and $132,000.
Creative Strategy #1 – Make Your Child a Sub-Contractor. If you own a small business, this is one of the best strategies you have at your disposal. Expand your business to the town where your child is going to college, put them on the board of directors, give them specific marketing duties in the business…bottom line…get them legitimately involved in your business. THEN, you can pay them a 1099 (since they are probably over 18, unless you have a child genius) and your child now has their own small business and you get a killer write-off in your business. The bad news is the child may now have to pay or deal with SE tax themselves, and again, once their taxable income exceeds $6,300 (in 2015), they are paying income taxes themselves (albeit at probably a lower rate).
Creative Strategy #2 – Put Your Child on Payroll and consider a 127 Plan. nNot as common, as you will see for the reasons set forth below, but it’s a plan where an employee’s gross income and wages do not include amounts paid or incurred under an employer’s qualified educational assistance program (This would be your child’s paycheck for working in your business). More to the point, the first $5,250 of qualified educational assistance provided during the calendar year under a Section 127 plan is exempt compensation for federal income tax, social security and Medicare tax (FICA), and federal unemployment tax (FUTA) purposes. This also includes graduate courses. Sounds great, but there’s one major problem, you can’t hire your kids in a sole-proprietorship, S-Corp or LLC and set up a 127 Plan for them (You have to use a C-Corp).Moreover, the plan must meet an eligibility test, and no more than 5% of the benefits during the year may be provided to more-than-5% owners (or their spouses or dependents). Thus, you end up having to use a C-Corporation, and surprisingly you are good to go with children 21 and older!
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