Education Tax Deductions Post 1

Wednesday, June 1, 2011 17:34
Posted in category Shopping

It’s my understanding that a family must have an adjusted gross income of less than $100,000 in order to take advantage of the new education deductions. Our AGI works out to a bit over $100K. However, we have three children in college. Will we be able to use this deduction at all?

There are six new tax breaks related to education, so here’s a summary of all of them (as you read on, keep in mind that tax credits reduce your tax bill, dollar for dollar):

EDUCATION IRA
Starting in 1998, you can contribute up to $500 per year to an Education IRA for the benefit of each family member who is under age 18.
Education Tax Deductions
1. Education IRA
2. Hope Scholarship Tax Credits
3. Lifetime Learning Tax Credit
4. IRA Withdrawals
5. Deduction of Loan Interest
6. Child Tax Credit
You must name one of your children as the beneficiary (each child can have a separate Education IRA), and contributors do not have to be parents or even relatives. You can put a mutual fund, bank CD or other investments in this Education IRA. Because it is such a small amount, many mutual funds are charging low fees. One that does not charge: the Stein Roe mutual-fund family, but you must put in the $500 in a lump sum.

Although the contributions are not tax-deductible, the money grows on a tax-free basis. Distributions are tax-free when used to pay for qualified education expenses — tuition, fees, some room and board expenses — for the person for whom the account is maintained.

Any funds not spent by the time the child reaches age 30 must be rolled over into another Education IRA within the beneficiary’s family, or the money must be distributed and will be subject to regular income tax plus a 10% IRS penalty.

Contributions are phased out as your modified AGI rises from $95,000 to $110,000 on a single return, and from $150,000 to $160,000 on joint returns. If you have income near the phaseout range, you cannot make contributions. If a parent’s income level is above these thresholds but the child’s grandparents’ is not, have them make the contribution into the child’s account.

Don’t rely solely on the Education IRA to fund your child’s education because it won’t be enough. If you contribute $500 annually for 17 years, you’ll have about $18,225, assuming a pretax return of 8% each year.

CAUTION: If anyone at all has made a contribution to a qualified state tuition plan on behalf of your child, no contributions may be made to an Education IRA set up for the benefit of that same child in the same year. If you think this caution may apply to your family situation, check with your accountant.

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