by Howard Freedman
A college education is expensive but worth every penny in terms of the opportunities it can open. With escalating college costs, §529 Qualified Tuition Programs now offer tax-free benefits on earnings used for qualified education expenses. Section 529 plans are one of the most popular new savings vehicles that can be purchased individually or as an added convenience through company supported after-tax payroll deductions. Unlike §401(k) and §403(b) plans, §529 plans are inexpensive to implement, easy to maintain, have no qualification requirements, and are in great demand. What Is a §529 Plan?
There are two types of §529 plans. A prepaid tuition plan, sponsored by individual states and their financial partners, lets a contributor lock in current tuition rates with different investment options. The contributor makes lump-sum or installment payments to the state through its investment managers. A college savings plan allows contributions to be invested over time at various levels of risk that can be used for higher education expenses.
Earnings on these investments are tax deferred when earned and tax exempt if used for qualified distributions, such as tuition, room and board, books, fees, transportation, computers, and supplies. Withdrawals can be applied to graduate and undergraduate institutions, technical schools, junior colleges, and vocational schools accredited by the U.S. Department of Education. Some states even allow income tax deductions for full or partial contributions into their states' §529 plans.
Plans can be purchased individually or through payroll deductions when available. Contributions can be as little as $25 to $50 per month, with total contributions averaging $235,000 for state savings plans and $50,000-$100,000 for prepaid tuition plans. Plans can be established for relatives, friends, or the contributor himself or herself. If the need arises, the family beneficiary can be changed to another family member without penalty. By definition, a family member can be the original beneficiary's spouse, child, sibling, nephew, niece, first cousin, or any spouse of those persons.
There are also some limitations and disadvantages to consider. The new laws governing §529 plans will be in effect through 2010 unless they are permanently extended. However, the biggest impact is how need-based college financial aid is calculated. Withdrawals from a prepaid tuition plan to pay for college will reduce need-based financial aid dollar for dollar. On the other hand, college savings plans in a parent's or owner's name are considered assets of the owner and assessed at a much lower rate when calculating the need based aid. In either case, it pays to have money in hand, as the amount of financial aid a student will receive is never guaranteed. Setting Up A Plan
Setting up a group §529 plan can be relatively simple but is not a sure thing. Start by creating focus groups to understand if this is an attractive benefit. Evaluate whether it is worth moving forward with a group §529 plan. Interview different plan administrators that can help identify their services, options, and alternatives based on employee feedback, demographics, plant locations, and administrative resources. Recognize that tax benefits may vary by state and that employees working in other states may not be able to take advantage of their states' favorable tax treatments. If this is the case, provide resources that offer individualized programs other than those supported by payroll deductions.
tax benefits for those facing the expenses of higher education.
Coverdell Education Savings Account -Taxpayers can save up to $2,000 per year for students under age 18 with Coverdell Education Savings Accounts. Contributions are not deductible from paychecks, but earnings remain tax-free if used for tuition, fees, books, room and board, and even precollege education expenses, private secondary school uniforms, computer equipment, and more as long as it is used by the time the student is 30. This benefit is phased out If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. See Contributions, later.
HOPE Scholarship Tax Credit is gradually phased out if the modified AGI is between $47,000 and $57,000 and between $94,000 and $114,000 for joint filers. It gives taxpayers a credit of up to $1650 for qualified education expenses. The HOPE credit is equal to 100% of the first $1,100 and 50% of the next $1,100 of college tuition expenses paid on behalf of the taxpayer, his or her spouse, or his or her dependent during the student's first two years. This credit reduces your tax liability for up to $1650 in 2007. The student must be enrolled in at least half the number of credits required of a full-time student.
Lifetime Learning Credit allows taxpayers to claim an annual credit equal to 20% of up to $10,000 in tuition expenses. It is gradually phased out for taxpayers with a modified AGI between $47,000 and $57,000 and between $94,000 and $114,000 for joint filers. Unlike the Hope Credit, part-time students and working adults taking classes to improve their job skills can take advantage of this credit.
Payroll Guide Newsletter, 02/21/2003, Volume 62, No. 04
