For almost every family in America except the very rich trying to figure out a way to pay for their children’s college education is a very real and pressing concern. A four year program at the cheapest public school in the country will cost from $40,000.00 to $50,000.00 a year and at a good school you are looking at least $100,000.00 a year and probably more.
That’s why you have to start planning now for that happy day when it’s time for your kids to head off to college and the good news is that you can use the tax system to help pay for the bills. In 2001 the United States Congress approved $29 billion in tax cuts for families facing education bills and you should at least get your share of that money to help finance your families college education plans.
The changes included increasing the contribution limit under the Education IRA from $500 a year to $2,000 for each child under age 18 into a special Education Individual Retirement Account. You get to take this money out without paying taxes when your child enters college and along the way you get tax-deferred growth and tax-free withdrawals.
There are some restrictions on qualifying for the Education IRA phases out if your income is over $100,000.00 individually or $200,000 as a couple but if you don’t qualify you can set the account up under a grandparents name.
There are also education tax credits that help defray the cost of a college education and they include the Hope Scholarship and the Lifetime Learning Credit.
The Hope Scholarship offers a tax credit of up to $1,500 a year for the first two taxable years that your child is in college. You get a dollar-for-dollar tax credit for the first $1,000 of tuition and related expenses and 50 cents on the dollar on the next $1,000.
The Lifetime Learning Credit applies to expenses for academic periods, and can be used any year for an unlimited number of years. It provides a 20redit on the first $10,000 of qualified expenses that also includes educational expenses to acquire or to improve job skills.
Once again, these tax credits are phased out by income levels of between $80,000 and $100,000 for family incomes and $40,000 to $50,000 for single filers. Please note however that you can’t use an Education IRA and a tax credit to pay for the same expenses.
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