Back to top


Click here to go back

"Tax Plannnig for College"

Posted by Admin Posted on Aug 01 2019

Qualified tuition programs (529 plans) - A qualified tuition program (also known as a 529 plan) allows you to buy tuition credits at today’s prices for a child or make contributions to an investment account set up to meet a child's future higher education expenses.

Contributions to these programs aren't deductible for Federal tax. However, they are deductible for Pennsylvania tax.

The earnings on the contributions accumulate tax-free until the college costs are paid from the funds. Distributions from qualified tuition programs are tax-free to the extent the funds are used to pay “qualified higher education expenses”—which can include up to $10,000 in expenses for tuition for an elementary or secondary public, private, or religious school. Distributions of earnings that aren't used for “qualified higher education expenses” will be subject to income tax plus a 10% penalty tax.

Tuition tax credits - You can take an American Opportunity tax credit (AOTC) of up to $2,500 per student for the first four years of college—a 100% credit for the first $2,000 in tuition, fees, and books, and a 25% credit for the second $2,000. You can take a Lifetime Learning credit of up to $2,000 per family for every additional year of college or graduate school—a 20% credit for up to $10,000 in tuition and fees.

Both credits are phased out for higher-income taxpayers. The AOTC is phased out for couples with income between $160,000 and $180,000, and for singles with income between $80,000 and $90,000. The Lifetime Learning credit is phased out (for 2019) for couples with income between $116,000 and $136,000 ($114,000 and $134,000 in 2018), and for singles with income between $58,000 and $68,000 ($57,000 and $67,000 for 2018). The phase-out range for the Lifetime Learning credit is adjusted annually for inflation.

If paying for tuition with a 529 plan, consider paying $4,000 from funds outside of the 529 plan to allow for the maximum American Opportunity credit to be claimed.  Amounts paid from a 529 plan can be either exempt from tax on the earnings or eligible for the tax credit, but not both. 

Series EE U.S. savings bonds - Series EE U.S. savings bonds offer two tax-savings opportunities when used to finance your child's college expenses: first, you don't have to report the interest on the bonds for federal tax purposes until the bonds are actually cashed in; and second, interest on “qualified” Series EE (and Series I) bonds may be exempt from federal tax if the bond proceeds are used for qualified college expenses.

To qualify for the tax exemption for college use, you must purchase the bonds in your own name (not the child's) or jointly with your spouse. The proceeds must be used for tuition, fees, etc., not room and board. If only part of the proceeds are used for qualified expenses, then only that part of the interest is exempt.

If your adjusted gross income (AGI) exceeds certain amounts, the exemption is phased out. For bonds cashed in during 2019, the exemption begins to phase out when joint AGI hits $121,600 for joint return filers ($81,100 for all other returns) and is completely phased out if your AGI is at $151,600 for joint filers ($96,100 for all other returns).

Scholarships - Scholarships are exempt from income tax, if certain conditions are satisfied. The most important are that the scholarship must not be compensation for services, and it must be used for tuition, fees, books, supplies, and similar items (and not for room and board).

Employer educational assistance programs - If your employer pays your child's college expenses, the payment is a fringe benefit to you, and is taxable to you as compensation, unless the payment is part of a scholarship program that's “outside of the pattern of employment.” Then the payment will be treated as a scholarship (if the other requirements for scholarships are satisfied).

Tuition reduction plans for employees of educational institutions - Tax-exempt educational institutions sometimes provide tuition reductions for their employees' children who attend that educational institution, or cash tuition payments for children who attend other educational institutions. If certain requirements are satisfied, these tuition reductions are exempt from income tax.

College expense payments by grandparents and others - Amounts paid by grandparents and others are not subject to gift tax if paid directly to the educational institution for tuition. 

Student loans - You can deduct interest on loans used to pay for your child's education at a post-secondary school, including some vocational and graduate schools. The maximum deduction is $2,500. However, the deduction phases out for taxpayers who are married filing jointly with AGI between $140,000 and $170,000 (between $70,000 and $85,000 for single filers).