College Funding Tax Considerations
This discussion of tax considerations provides only a general overview; tax laws are constantly changing. Consult a tax professional or financial advisor before investing, and review investments regularly. In particular, if you move money from one account to another there may be tax implications. If you are unsure of the implications, always seek professional advice.
Here are just a few examples of tax considerations that could affect college funds:
- Loans. Many families find that their savings is not enough to cover the entire cost of a child’s education. If you take out a qualified student loan, in your name, to pay for your child’s education, the interest on that loan may be deductible as long as the child was your dependent when the loan was received. If a child who is no longer a dependent takes out a loan in their own name, they may be able to deduct the interest. Note that a qualified loan is one used to pay tuition, fees, living expenses, books, supplies, and transportation expenses.The maximum amount of interest deductible on a qualified student loan is $2,500—per return. There are also certain income restrictions. The deduction is phased out if your modified adjusted gross income is in the range of $50,000 to $65,000 for single filers, and $105,000 to $135,000 for joint filers. Consult a tax professional before planning on this deduction, as other restrictions may apply.
- Custodial Accounts. You can transfer assets to a custodial account for your child under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). Income on assets in these custodial accounts is generally taxed at the child’s rate, although some exceptions may apply. Consult a financial professional for information relating to your specific situation.
Note that putting assets in your child’s name could reduce the amount of financial aid he or she is eligible to receive. It is also important to realize that unlike 529 College Savings Plans, these custodial accounts belong to the child. The account terminates and becomes the child’s property, to do with as he or she chooses, at a specific age (usually 18 or 21) specified by state law.
FROM http://www.metlife.com