As a new school year approaches, so does the stress associated with planning for the high costs of college. Don’t despair – with a little planning, there are many ways to ease that stress by reducing the cost of college education for your children.

One option is to transfer assets to your children (directly or in trust). If your child is not subject to the "kiddie tax," he/she would be taxed at his/her lower rate, which could be as low as 10%. However, be sure the gift is $13,000 or less ($26,000 per child for couples) or you may have to file a gift tax return (the "annual gift exemption").

Other options include qualified tuition programs (e.g. 529 plans) and Coverdell educational savings accounts. Qualified tuition programs allow family members to buy tuition credits or make contributions to an account set up for a child’s future education. Contributions are not deductible, and the transfers are subject to the annual gift exemption; however, the plans can be funded at one time with up to five years of gifts equaling $65,000. Similarly, Coverdell programs are funded with up to $2,000 for each child under the age of 18 (age limitation does not apply to special needs children). The earnings of both accounts are accumulated tax free, and if distributions are used to pay for qualified higher education expenses, the distributions are tax-free.

Different investment vehicles may also provide options. For example, tax-exempt bonds provide a means of achieving economic growth while avoiding tax. Further, Series EE U.S. Savings bonds offer savings because the interest on the bonds is not reported until the bonds are cashed in, and the interest may be exempt if the proceeds are used for qualified college expenses.

At tax time, don’t forget your credits and deductions. Look for the American Opportunity Tax Credit (Hope Credit), which provides a credit up to $2,500 per student for the first four years of college, and the Lifetime Learning Credit, which provides for up to $2,000 per family for additional education. The American Opportunity Tax Credit is 40% refundable, meaning you can get a refund if the credit is greater than your tax liability. Student loan interest is also an important deduction (up to $2,500). The interest is an above-the-line deduction, meaning you don’t have to itemize.

Job selection also makes a difference. Student loan interest and debt may be forgiven if your son or daughter works in certain professions and undertakes certain jobs. If the debt is forgiven, it will not be subject to income tax as long as all required services are performed. As a parent, you may be able to find a job where your employer assists or pays for your child’s education, or obtain a job at a school that offers free or reduced tuition for children of employees.

Gifts from family members are also commonly used to assist with college. However, who receives the gift makes a difference. If the gift is given directly to the student, the amount of the gift is subject to the annual gift exemption. Alternatively, if payment is made directly to the education institution for qualifying expenses, the amount that may be given is not subject to the gift limitations.

For loans, consider tapping into home equity before going to the bank or looking to retirement accounts. If the interest is classified as qualified residence interest, it may be deductible. This may not be the case if the loan is a bank loan or a loan from your pension. Further, a loan from your pension must meet strict requirements or it may be classified as a premature distribution subject to regular income tax and penalties.

This article is an excerpt of a longer article detailing many of the requirements under the programs and listing additional options. If you would like the full article, log onto www.szaferman.com.

If you would like additional information or are interested in signing up for E-Advisories on this and other topics, please contact Ben at bbranche@szaferman.com

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