Now that we are in the spring, many parents are getting ready to send their high school seniors off to college for the first time.  Because of this, I am getting a lot of calls from clients on how to best take withdrawals out of their 529 Plans to pay for college expenses. 

First off, I want to make a plug for a great website called www.savingforcollege.com There are a lot of good answers on the site including a great article titled “Avoid These 529 Withdrawal Traps.

One question that was just asked of me yesterday was whether that client could use both the tax credits available (summarized in STA’s “Annual Tax Filing Tips Newsletter back in March) and still use their 529 Plan to pay for college…great question.

To make the most of your Section 529 College Savings plan assets, you should consider the following issues/strategy:

First – Understand Your Anticipated “Qualified” Expenses (both type and amount):

Withdrawals from a 529 college savings plan are tax free, provided that:

  1. You don’t take more from then plan than the total of your child’s Qualified Higher Education Expenses in that tax year, and  
  2. They are used for Qualified College Higher Expenses that include items such as tuition, fees, books, supplies and required equipment (a list of these Qualified expenses can be found in IRS Publication 970.‎)

Second – Don’t Waste Your Tax Credits:

US Tax Payers below certain income thresholds* may qualify to take advantage of the American Opportunity Tax Credit.  For 2014, this credit is equal to 100% of the first $2,000 of qualifying expenses (see above) and 25% of the next $2,000, for a total tax credit (direct reduction in your income tax liability) of $2,500.

However, you cannot “double dip” this tax break.  That is, you cannot take the credit for the SAME educational expenses you paid with money withdrawn from your child’s 529 Plan.  For this reason, you might consider paying the first $4,000 of your child’s tuition with your own money and paying the balance of your child’s qualified college expenses from the 529 Plan.  That way, you may be able to use both the American Opportunity Tax Credit and the income “exclusion” for the qualified 529 Plan distribution.  That being said, please check with your financial and tax advisor to see how best to make this work in your personal situation. 

Bottom line, proper planning will help you get the most out of the tax breaks that are allowed by law. As a parent with a son in college myself, I wish your family all the best as your child leaves home for college – it is an exciting life milestone!

  • in 2014, the credit phases out ratably for single tax payers with Modified Adjusted Gross Income of $80,000to $90,000 ( or $160,000 to $180,000 for married filing jointly).

IMPORTANT DISCLOSURES

Financial Planning and Investment Advice offered through Avidian Wealth Management (STA), a registered investment advisor.

STA does not provide tax or legal advice and the information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

As always, a copy of our current written disclosure statement discussing our services and fees continues to be available for your review upon request.

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Financial Planning and Investment Advice offered through Avidian Wealth Solutions (Avidian), a registered investment advisor. Avidian does not provide tax or legal advice and the information presented here is not specific to any individual’s circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer to avoid penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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