Planning for the College Years

By Kimberly Pecora February 18, 2020

How quickly it happens. One minute you are getting them ready for their first day of school and before you know it they are heading off to college. As parents there are many anxieties that come with this milestone. Here are a few things you may want to consider to help alleviate some of those concerns.

Legal documents

There are several documents that will be important to execute before your child leaves. At the age of 18, your child is considered an adult, therefore as a parent you are no longer permitted to obtain information about your child from health care providers, financial and educational institutions. In the case of an emergency you want to make sure you have several key documents in place to protect you and your child. Having prepared certain documents in advance will allow you to step in and make important medical and financial decisions in situations where your child is unable to do so. Speak with your legal advisor for help with the following:

1. A health care power of attorney will allow the parent to make health care decisions for the child in the event they are unable to do so themselves.
2. HIPAA release: due to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), this release is required in order for health care providers to release the child’s medical information to the parent.
3. A general durable power of attorney will allow the parent to make financial or legal decisions on behalf of the child.
4. FERPA release: due to the Family Educational Rights and Privacy Act, this document must be in place to allow the college to share educational and financial information with the parent.

Education credits and 529 plans

Have you spent years saving for your child’s college education through a 529 plan? Now the time has come to decide how best to use that plan. If the plan is owned by the parent or student, the asset is reported on the FAFSA forms, which factors into financial aid eligibility. So you could decide to use a portion each year, or decide to deplete the 529 plan up front to increase financial aid eligibility in later years. But there are tax considerations to take into account as well.

Qualified distributions from a 529 plan are tax-free, so what’s to consider? If you qualify for the American Opportunity Tax Credit (income limitations are outlined below), you may consider how to pay for college expenses in order to benefit from this credit. The AOTC provides a tax credit up to $2,500 based on up to $4,000 of expenses for tuition and textbooks. The credit is worth more per dollar of qualified expenses than the tax-free distributions from a 529 plan. Carve out up to $4,000 in tuition and textbook expenses and pay those from personal funds to claim the credit, then tap into the 529 plan for additional expenses to maximize your tax benefit.

Parents are often unable to take the education credit due to income limitations (as noted below). If the parents are unable to claim the credit, the student may benefit from doing so. Students may claim the credit if they file their own tax returns, are not claimed as dependents on another return (i.e. parent’s return), and they have sufficient taxable income against which to take the credit. If the credit brings the tax owed to zero, up to $1,000 of the credit may be refundable.

The timing of tuition payments could help in maximizing those credits. For example, if the student will graduate in 2021 and start working that year, delaying tuition payments from December 2020 to January 2021 will provide expenses paid to allow the student to claim the credit on a 2021 return – a return that likely will report more income (and therefore offer the potential for a higher credit) than the prior year, in which he or she was a full-time student for most of the year.

Such considerations provide planning opportunities to maximize the credit, whether it be the parent or the student.

The income limitations for the AOTC are as follows:

• To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
• You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
• You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).

Let us help you with your tax planning to take advantage of these tax saving strategies. If you have questions or would like to discuss the above information as part of your tax planning, please reach out to your BNN tax advisor at 800.244.7444.