With summer will be in the rearview mirror and the school year will be upon us, have you done your “homework”? By that, there is no better time for a fresh start with college planning than at the onset of a new academic year. After all, September is National College Savings Month for good reason. And your tax and accounting partners at O’Donnell, Ficenec, Wills & Ferdig want to give you a jumpstart to a fruitful savings year for you and your family. There are many opportunities to save for your child’s (or other dependent’s) future -- without incurring unnecessary and burdensome tax obligations.
Are you taking advantage of credits?
There are two educational credits that are well worth looking into:
The American Opportunity Tax Credit (AOTC) -- Claim up to $2,500 per eligible student each year. The credit applies to qualified educational expenses during the first four years that the student is enrolled in an institution of higher learning. Additionally, if this credit brings the tax owed amount to “Zero,” 40% of the remaining credit (up to $1K) is refundable.
The Lifetime Learning Credit (LLC) applies to qualifying tuition and related educational expenses up to $2,000 (per tax return). There is no limit on the number of years that the credit can be claimed, and it can even be used for training to improve or build professional or technical skills.
More specifics can be found on the AOTC and LLC here and here, respectively. Also, the Internal Revenue Service has created a handy chart. So, you can clearly see how the criteria, maximum benefit, Adjusted Gross Income (AGI) limits and qualifying programs and windows differ between the AOTC and the LLC. Of course, we urge you to contact our professionals with specific questions about your situation. We are here to help! It is imperative that you are eligible for the credit before claiming it. If the claim is incorrect or in error (i.e., supporting documentation is lacking), the AOTC amount that was paid to you must be paid back – with interest. Penalties can also be assessed for inaccuracies or even fraud. You may also be banned from claiming this credit – for anywhere from two to 10 years. Again, this is where expertise from tax professionals with extensive IRS experience and the knowledge of the latest legislative changes can be beneficial to assure your documents are accurate and complete.
Build your child’s college “NEST” egg
NEST represents the 529 plan that is available courtesy of the state of Nebraska to help students and their families save for college. As with other 529 savings accounts available in other states, NEST allows for earnings to grow, untaxed, and for qualified monies to be withdrawn without having federal or state income taxes levied on those dollars. While these monies are in the plan, the investment growth is not subject to taxes – it is all for your child to use toward college tuition and related expenses such as books. A few key takeaways from the state-sponsored and state-administered program include:
For each beneficiary, contributions have a ceiling of $500,000.
The tax advantages for investments in NEST plans include a state income tax deduction of up to $10,000 each tax year.
Those who own the savings accounts benefit from the tax-related advantages, no matter where they reside.
On its College Savings Month website, the National Association of State Treasurers further lists 529 plans sponsored, administered, and overseen by respective states. These plans include College Savings Iowa and Kansas Learning Quest 529.
Opportunities to save abound!
Sometimes the most impactful savings can be found in the most surprising of areas. And more savings in some areas, means more money “in the pocket” for vital needs like room and board.
As anyone who has had the college experience will recall, textbooks are no small area to allocate your savings toward. Costs rocket upward with each passing semester. To combat this, we encourage readers to buy used books whenever possible, often at considerable cost savings. The same concept applies to other gently “worn” or refurbished items such as furnishings and electronics. Institutions, including our own University of Nebraska at Omaha, have also embarked on Open Educational Resources (OER) initiatives. OER is a free or reduced-cost digital course materials programs. These materials are used in lieu of standard textbooks. These and related digital and eBook resources can truly be a lifesaver for families struggling with college costs, and support students’ successful academic careers.
Since the cost of meal plans vary dramatically, it might be in the best interests of your savings to anticipate how each plan would be used. If, for example, your child has late classes and tends to eat morning meals on the go, a more affordable plan with fewer meals may be most appropriate. After all, you do not want to pay substantial fees for plans that are not maximized.
Consider the many “complimentary” services and amenities that are available on college and university campuses. It is not only convenient, but cost-effective, to forgo costly entertainment or fitness and gym memberships when the college offers them. After all, things like onsite movies, concerts, fitness classes, weight training equipment and swimming pools are for student use and are a part of the college experience. In some way or other, college fees are going toward these assets. Students should make the most of them!
Of course, as long as your child is enrolled in an eligible institution, he or she may be eligible for a wide range of scholarships, grants, work-study programs, paid research opportunities (in partnership with faculty), monetary merit-oriented prizes for projects, or any number of opportunities to trim the fat off of your tuition bill. Additionally, both school guidance and college financial counselors can be invaluable sources of knowledge that are often underutilized. We encourage you and your child to work with these resources that are, again, free. Staff within your child’s college financial aid department may also be able to review current aid and adjust or help your child to take advantage of additional or new programs. Just because one embarks on his or her college career in a certain financial state does not mean this situation has to stagnate; savings can evolve and grow along with your child and the new knowledge, skills, and experiences that are picked up along the way.
The functions, tasks, obligations, and responsibilities that others dread represent areas where we shine. No tax challenge or college savings goal is too daunting, complex, bleak, or dire for our experienced team to take on. After all, we at OFWF have been “at this” for more than 70 years. We look forward to supporting you and the “next generation” in successfully reaching your personal and/or business goals. Contact us today.