Planning & Education | Don't Pass Up Education Incentives

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Don't Pass Up Education Incentives

529 Plans and Education IRAs
Legislation was passed that allows for federal tax-free distributions from 529 plans for qualified higher education expenses¹. Most states now permit in-state residents to take qualified state tax-exempt distributions from their state plans as well. Likewise, the definition of qualified tuition programs was expanded to include pre-paid tuition programs for both public and private institutions (not including elementary and secondary school expenses). These legislative changes allow for tax-free rollovers between different Qualified State Tuition Plans for the same beneficiary, with a limit of one rollover every 12 months.

Formerly known as the Education IRA, the Coverdell Education Savings Account is a trust or custodial account created for the purpose of paying the qualified education expenses of the designated beneficiary of the account. Contributions are non-deductible for income tax purposes, but your investment grows tax-free until dispersed. Qualified education expenses now include elementary and secondary school expenses, as well as undergraduate and graduate expenses, and the AGI phase-out range for married couples filing jointly is $190,000 – $220,000 — twice that of single taxpayers. There is no limit on the number of separate Coverdell ESAs that can be established but total contributions for each beneficiary cannot exceed $2,000 per year.

The Advantage of Other Education Incentives
In certain situations, there is a special deduction allowed for paying interest on a student loan. This deduction can reduce the amount of your income subject to tax by up to $2,500 annually. Also, the exclusion of employer-provided educational assistance is now up to $5,250 annually.

Next: Remember the Alternative Minimum, Gift and Estate Taxes

1. Under applicable federal law, qualified distributions are not subject to federal income tax. However, this law is set to expire on December 31, 2010, and unless the law is extended by Congress and the President, the federal tax treatment of 529 plans will revert to its pre 01/01/02 status.

This information is general in nature and is not intended to constitute tax advice. Please consult your tax advisor for more detailed information on tax issues and for advice on your specific situation.