The cost of financing a students college education continually increases. Parents and students need to understand some basic college financing options and start saving – now! It is never too early!
The Uniform Transfers to Minors Act (UTMA) and Section 529 plans are two investment vehicles that, when used properly, can assist with reducing or eliminating taxes on certain college investments. The more money received from investments – obviously, the less your college student will borrow.
Parents can shelter up to $2,100 of passive income, in the form of dividends and net capital gains, without having taxes. The income must be dividends or net capital gains to be certain of that treatment. When the income is a mix of dividends and capital gains and say, interest income, then some of the income could become taxable.
Income in the students account that exceeds the $2,100 thresh-hold may incur taxes at the parents marginal rate. This could become costly.
Earnings from Section 529 plans (named after the relevant IRS code section) are not taxed currently nor are the plan distributions used to pay for higher education costs. Section 529 plan contributions are deductible in the State of Pennsylvania (and most states) but not for federal tax purposes.
Certain 529 plans are considered pre-payment plans. These plans will index and increase the 529 investment amount if the student’s selected college increases its tuition. This is an important protection against the ever increasing cost of higher education.
The more – small job, birthday, gift and special occasion money received over the years, the more years that money can grow. So maximize the time you invest for college tuition in-order to maximize the college funds available – while minimizing taxes with some basic tax strategies – a highly intelligent strategy indeed!
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