The president of Tuition Plan Consortium Nancy Farmer said, “Tax season is a very important time for families to think about saving for college”. The Tuition Plan Consortium is a national group of universities and colleges that sponsors Private 529 College Savings Plan. Farmer also stressed about taking advantages of tax incentives that many families are potentially unaware of. During tax seasons it would be best to talk to a financial adviser about tax refunds and how it could boost your savings for college.
That there are several changes on 529 plan rules which are tax-related and could have a great impact on college savings on three key areas. These are:
- Coverdell Education Savings – now has its provisions extended. Also known as the “Education IRA”, it can now be used not only for higher education but also for secondary and elementary education. It covers all expenses with tuition, books, rooms, and board. Good news is that the $2,000 limit has been extended instead of reverting back to $500 for the year 2012. This plan offers tax-free growth with your earnings and tax-free withdrawals as well provided that it is used for qualified expenses.
- Tech Support for 529 Plans – If you want to avoid facing penalties with your 529 plans then you should never fund expenses with technology-related equipments such as computers, internet access, software, and etc,. Although it would make sense to make your 529 plan cover these expenses it is not allowed. Yes it was allowed during the earlier years, but this rule has not been extended in the year 2011.
- Savings from Grandparents – Recently last December, the estate-tax exemption and the gift tax lifetime exemption has been unified providing our grandparents with more incentives. This would mean that any combination of estate or gift will be exempted from tax if it totaled less than or equal to $5,000,000. Take for example grandma gifts $3 million while she is alive, then her remaining $2 million will enjoy tax exemption when she dies. This rule will be very advantageous to wealthier families who can make gifts for up to $5 million, tax exempt, while still alive.
529 tax deduction applies with gifts concerning college education. With any other gifts that you give, the recipient will be charged with taxes on any amount exceeding $13,000. But with 529 plans you can take advantage of the “five-year gift tax averaging” provision. With this, an individual is allowed to give gifts (without incurring any taxes) amounting to $65,000 ($13,000 x 5) maximum in a single year instead of only $13,000 ($26,000 for couples) annually. Contributions with 529 plans have an assurance that the funds are used for a worthy cause and at the same time lowering your estate’s potential tax liabilities.
It is very important that we understand recent tax changes because as a matter of fact, most If not all parents and grandparents have there investments on the best 529 plans reaching a record level of assets according to William Raynor, Vice-Chairman of the College Savings Foundation.