Saving for College – Tax Free!

Saving for College – Tax Free!

By Diane Kennedy, CPA/Tax Strategist
www.taxloopholes.com

Are you worried about saving for your children’s future college expenses? If so, you’re not alone. It’s one of the biggest challenges facing parents today. There a couple of options available that allow you to save on taxes while you get ready for college. The best of all worlds is when you can combine both plans into one dynamic, tax saving plan. Step One - 529 Plan The first idea is to use a fairly new option that the government has given us called a 529 Plan, also known as a Section 529 Plan. The 529 Plan is set up and operated by each state. So, while the details may vary slightly from state to state, the great benefits remain the same.

(1) Tax Free Growth! The investment in the plan will grow tax-free as long as the money stays in the plan. So, when the amount is distributed to your child for their tuition, there is no tax due! With a 529 Plan, there’s no tax due ……. ever.

(2) You’re in Control! You, not your child, is in control of the account. So, if little Suzy decides she’s rather have the money for a really great car and stereo system when she’s college age instead of going to school, she’s out of luck!

(3) Set It Up and Forget It! The 529 plan can be set up through the state treasurer’s office or by an outside investment company. Plan assets will be professionally managed. You aren’t required to file any tax returns for the plan.

(4) Everyone Can Do It! With so many tax provisions geared to your income (i.e., you make too much money, you lose it), this is one of the few things of which everyone can take advantage. In fact, some of the state plans allow as much as $200,000 per beneficiary. And, here’s a trick – you can be your own beneficiary. So, if your dream is to go back to school, you can create your own tax-free plan to make your dream come true..

Contact your state treasurer’s office, personal accountant, bank or investment company for more information on how you can start saving for college today.

If you have a business, or have ever thought of having one, now might be the time to think about paying your child for work they legitimately do within the business. In fact, if you pay them $4,700, they won’t pay tax if they don’t make any more money and you get the deduction for your business. There are three audit-proofing rules we give to our clients when they employ their children:

(1) Make sure you have a written job description.

(2) Keep track of hours worked through a time card or the like.

(3) Pay a reasonable wage for the work performed.

If you’ve ever thought of taking your favorite hobby up a notch, now might be the time. The tax benefits are terrific and you can start building a financial future doing something you like. Of course, you need a legitimate business to take business deductions.

The best plan comes when you combine both step one and step two. Your child can be paid (tax deduction for your business) and accumulate the money in a 529 plan. That way you get to both take the tax deduction PLUS take advantage of the tax free growth in the 529 Plan.
 

About the Author

Diane Kennedy, C.P.A. is the co-author of Real Estate Loopholes and the author of the best-seller Loopholes of the Rich.- How the Rich Legally Make More Money and Pay Less Tax in the Rich Dad's Advisor's series. She is also the founder and co-owner of DKA (D Kennedy & Assoc), DKadvisors and TaxCents as well as numerous real estate investment companies. Through all of these companies, Diane has built her reputation by empowering and educating others about the tax loopholes legally available to all individuals.