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Tax Bill Eases College
Savings
By Bruce Mushial
One of the largest expenses a family will face
is paying for a child's college education. If you have a number
of children the expense can add up. The good news is there
are many ways to plan for this expense and the new tax bill
just signed into law contains some features that make the
whole task easier. For a recent newborn, the expense of
attending a top tier college or university for four years
will be over $200,000 by the time they reach college age.
In addition to the usual scholarships and student loans there
are a few ways of saving for a college education that are
relatively new. Most states now have Section 529 college-savings
plans. These professionally managed accounts allow funds to
grow tax-free. If you saved $3,000 per year from when a child
was 3 years old and earned a conservative 8 percent per year,
the account balance would be $81,500 when the child reached
18. Under the previous plan you could then withdraw the funds
at the child's lower tax rate. Unfortunately if you withdrew
the funds at a rate of $20,000 per year for 4 years, you would
still lose $3,000 per year to taxes assuming the child was
in the 15 percent tax bracket. The $12,000 paid in taxes would
certainly have paid for a lot of books and other expenses.
The good news is under the terms of the new tax bill the Section
529 withdrawals will be 100% tax free if used for educational
purposes. If you withdraw the funds for non-educational purposes
you are still subject to a 10 percent tax penalty. Under the
new guidelines, if the beneficiary of the account decides
not to go to college the account beneficiary can be shifted
to another family member, extending as far as a first cousin.
Many people haven't used the new Educational IRA Accounts
for the simple reason contributions are limited to just $500
per year. Even if contributions are begun at birth, it is
still difficult to amass an amount that will pay for college
expenses by the time the child reaches age 18. But, beginning
next year the annual limit on the Educational IRA accounts
will be raised to $2,000 per year, allowing a much larger
amount to be accumulated by age 18. The new tax bill allows
for a tax deduction of up to $4,000 per year for college tuition
and the deduction is available to a taxpayer even if they
don't itemize their deductions. The new tax bill will allow
a deduction of $3,000 in both 2002 and 2003. In 2004 and 2005
the deduction will be $4,000, and the deduction will end in
2005. Students can still deduct up to $2,500 per year in interest
on student loans. Under the new law students aren't limited
to a 5-year maximum period in which they can take the deduction,
which is good news since many students are taking up to 10
years to pay off their loans.
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