The sad thing is that this family could have avoided the financial pitfalls mentioned in this story with the correct knowledge and a little planning.
By Reyna Gobel, freelance education reporter for U.S. News, covering college savings.
Use this year's tax refund as a starting point to set a tax and savings strategy that will maximize your child's college fund.
Understanding how education tax credits and deductions affect tax refunds can help families map out next year's college savings.
Don't mistake that tax refund for a gift. "A tax refund can feel like found money, but it’s been your money all along," says Jason Washo, an Arizona-based certified public accountant and personal financial specialist.
That's why it’s important the money is put to good use, he says. If a tax refund is the result of a family's education tax credits or from state tax deductions for 529 Plan contributions – deposits made into tax-advantaged college investment accounts – a logical answer for many parents is to put the money toward paying for college in the following year, he says.
[Click here to see how a Private Reserve Banking strategy is an excellent tax and savings strategy for college funding .]
However, families should consider whether they should adjust tax withholdings so they don't get a refund in the future. That can allow parents saving for a child's college education to invest the money – and have it earn more – throughout the year. However, if a taxpayer's withholdings are reduced too much, he or she could be subject to a penalty for underpaying taxes.
Understanding why parents received a tax refund and the role education tax credits play can help them set next year's college savings strategy. Families should weigh how the following tax credits and deductions affected their tax refund this year before setting a savings or distribution strategy for college savings in the next year.
1. American Opportunity Credit: The American Opportunity Credit can be used for four years per student, says Ted Sarenski, a New York-based certified public accountant and personal financial specialist.
If a family or the independent student has already claimed the credit for four years, changing their withholding based on being able to claim the $2,500 annual tax credit the following year can have expensive consequences. Parents who plan on claiming this credit for a fifth year and adjusting their withholding accordingly could result in a $2,500 tax bill, Sarenski says.
If you're getting a refund because of the credit this year, depositing that money into a 529 plan account is a good option, Washo says.
2. Lifetime Learning Credits: This tax credit is generally used after the first four years, since the value is lower than the American Opportunity Credit. Provided families or independent students meet income requirements, up to $2,000 of $10,000 could potentially be credited per taxpayer, Sarenski says.
Problems can arise if the total education bill is under $10,000 and 529 plan funding is used for part of that amount. Savings from a 529 plan can’t be used to pay for the same education expense for which a taxpayer claims a credit. For instance, if a family uses a 529 plan to pay for tuition, they can’t claim the Lifetime Learning Credit on the same dollars.
If a family used 529 plan funds this year and wasn't able to take the tax credit, they need to evaluate whether they want to withdraw funds from the account next year, at least on the first $10,000 of expenses, Sarenski says.
The decision could involve factors such as financing education with student loans, whether the 529 plan funds will be needed to pay for education in future years or the number of students in a family. Thus, families may want to consider talking to their accountant or financial advisor when debating options.
3. State tax deductions and credits: States generally do not have income restrictions on how much a taxpayer can deduct for 529 plan contributions. But the same isn’t necessarily true for credits.
It’s important for families to check their individual state's requirement to see if any income changes they anticipate in the following year could affect the tax benefit in the future.
Some states will help taxpayers use state tax refunds for education savings by offering an option to transfer refunds directly into college savings accounts, says Roger Michaud, a former chairman of the College Savings Foundation. Two states offering this are Maine and Colorado. However, residents of other states should look for this option on their tax forms.
Paying for college isn't always about what families can spare from their own budgets or scholarships earned by students. Tax credits and deductions can be a big help.
The American Opportunity Credit alone adds up to $10,000 over four years of college. Once families investigate these various tax credits, estimate their income for the next year and look at how much money they’ll need to spend on education, they can plan how much they’ll save in 529 plans or spend from them.
Find Your Fit 2 Flourish in Life
Written By Lisa Mader. Reposted by Juanita McKenna
Parents left paying off their children’s’ college debt while the student is a basement dweller in their childhood home. Empty nesters left with empty retirement accounts after paying for college. Credit card debt extended to its limit. Why? These families focused on the 4 years instead of the 40.
The Four (or Five or Six) Years
Most families go about college selection focused on just that – college. By the junior year, the student is constantly pelted with the question, “Where are you going to college?” Finally in the spring of the senior year, they are able to answer that first question which is immediately followed by the next, “What’s your major?”
The grand experiment of trying on different majors for size in the first year or two of college is an expensive one. The result is often extending college to a 5th or even 6th year as only 36% of students who start college finish in 4 years. Colleges love this additional revenue stream; parents’ savings does not. Keep in mind the average student graduates with approximately $25,000 in school loans.
Experimenting can also be problematic if a student settles into a major that can be difficult to transfer into. Among these majors are engineering, architecture, nursing and some business schools. If you can’t get into your desired major, your options are now to settle or try to transfer to a different university. Neither are options that leave the student feeling happy.
How Did We Get Here
Why do parents make such a great financial sacrifice to their own peril? How do parents allow their kids to get into such a jam?
I’m a parent of three, and if you ask most parents what they want for their children, they just want them to be HAPPY. I’ll call it FLOURISH. Parents are willing to sacrifice to the point of pain for themselves to attempt to provide happiness to their children. It’s innate.
Focus on the Forty+ Years
LEAP’s Fit 2 Flourish Coaching turns college selection on its head. Instead of answering that initial question first, we look out to the 40+ years the student will work and aim to find potential best-fit careers based on their wiring as scientifically measured by the Birkman Personality Assessment. Our video from an interview with College Planning Relief does a great job of explaining it in detail.
By starting out at the best-fit career options, students then identify the single or often times multiple majors that feed to this career then they can ultimately back into colleges which are reputable for these majors. Bingo! They’ve now selected their college but with much improved methodology.
By focusing first on WHO you are, a student ultimately has a better FIT so they can FLOURISH and parents have HAPPY children, empty basements and full retirement accounts.
What's your retirement vision?
Most people will take time to plan for a big event like a quinceanera or a wedding but at the same time, we don’t automatically think about retirement planning with as much enthusiasm.
Retirement is a big event with years spanning a period of 25 or even 40 years. You may be able to borrow for college but for retirement, it’s best to plan ahead.
An early start is always better to set aside a supplemental income or emergency fund for retirement. But even if you have not done any planning, don’t let that keep you from seeking information and advice about your retirement options. If you have 10 years, 5 years, or even 1 year, it’s a good time to understand your options. Even one month before retirement can save you the headache and stress of making the wrong choices. It’s worth the effort to know the facts about how to enjoy your retirement and not be disappointed because you have to go back to work.
Give me a call and together we can explore your vision of retirement and help you make the best choices for your future.
The end of the year is approaching fast. There are many things to do for the holidays. And if your child is approaching college years, it comes too fast. Just yesterday, she was your little girl or little boy. Each year is in preparation for the rest of their lives. Enjoy the moments and also plan ahead. Saving for the cost of attending college is essential. It is just as important to keep your retirement plan intact. You can do both! Attend a workshop to find out how.
Here are a few excerpts from the CPR Student Preparation Guide:
Age One through Kindergarten. Explore the world with your child and take advantage of any and all learning opportunities. Think small--flowers, bugs and puddles. Think big--trees, pets, and the ocean. Start saving for college!
Grades 1 through 6. Enjoy books together. Praise accomplishments! Get involved in child's school. Help your child develop interests and hobbies outside of school. Continue to save for college!
Grades 7 and 8. Junior high or middle school is a critical time to lay the groundwork for high school. Your child should be getting good grades, participating in school activities and seeking opportunities for leadership. Keep saving for college!
Grade 9. Meet with your guidance counselor... to choose the right courses. Plan ahead so that there is enough time to take all of the math and other classes that college admissions officers want to see. Parents, stay involved. Find out what's involved in various occupations. Seek summer employment or volunteer work in a field that may be related to future career interests. Review your college savings plan and the student's personal budget. Your first "base year" for college aid begins January 1 of junior year.
Grade 10. Parents, plan with your students! Students, attend college fairs. Choose the right courses for college admissions and graduation. Practice for standardized tests by taking the PSAT. Read up-to-date books that describe colleges. Make a list of colleges that interest you. Parents consider your income and asset situation. Aid formulas look at income for base years ... in January of Junior year.
Grade 11. Grades for this year are important for college admission. Keep working! PSAT, SAT, ACT testing are in order. Attend financial aid information nights at school. Begin collecting financial data. This is your first base year. Plan college visits. Familiarize yourself with private scholarships. Check deadlines.
Grade 12. Strategize! Meet deadlines. Plan courses and schedule tests. Decide which colleges are most interesting to you. Prepare/update a college file. Make a list of due dates. Obtain needed recommendations. Family income tax returns should be prepared as early as possible. File the FAFSA. Complete your PROFILE for private college aid. Review the SAR (Student Aid Report). Send transcripts to colleges. Look into private scholarships and other funds and be mindful of the deadlines. Plan for finances and get ready for your first college bill. Receive and open letters from colleges to compare financial aid awards.
October 24th, 2013
Written by Matthew C. Keegan // 10/01/2013 //
The sticker price for most colleges and universities is just that: a suggested amount that you will pay for the upcoming academic year. In reality, few college students pay the full rate, with many able to reduce their costs through student aid, college scholarships and work programs. College money is typically not given directly to the student. Instead, those funds are usually credited against the total cost of a student’s education, including tuition, room and books.
What is Successful College Planning?
As college education costs continue to increase, students are piling up their college loan debt. To make it even more challenging, the reduced employment opportunities are causing students to worry about the ability to pay back their debt.
Successful College Planning must include the essential elements that promote the desired goal—a good education that does not break your own retirement plan or stress the students ability to pay their student loans. What specific steps can you take RIGHT NOW, even with little time to prepare? How do you minimize out-of-pocket costs? WHATEVER your income and assets happen to be, you need to know the keys to MAXIMIZE financial aid without creating unnecessary debt. How do you make private colleges AFFORDABLE? Are there any solid strategies to REDUCE the TIME for your student to graduate?
Sign up for one of the FREE scheduled workshops. As a Licensed College Planning Relief® Specialist, I help families like yours make the most financially savvy moves to keep your retirement intact while creating the opportunities for your children to receive the education they deserve.
How Much Are You Borrowing?
Tip Sheet | How To Succeed in College
Independence Day - July 4, 2013
This 4th of July, I plan to read the Declaration of Independence and the Bill of Rights. I appreciate the opportunities that this great country has given us. I invite you to read the founding documents for yourselves. Here are the links to the printer-friendly versions for your convenience. Click on the link to see the documents or copy a link and paste in your browser (Click the back arrow to return to my website):
The Declaration of Independence
The Bill of Rights
Amendments to the Constitution
Juanita McKenna. My mission is to help you worry less about money and focus more on living.