You don't need a Ph.D. to know that a college degree is important -- and expensive. One year at a public in-state college will set a family back an average of $17,131, while a private school will cost an average of $38,589, according to the College Board. And a child born today could cost more than $400,000 to educate at a private college for four years if college costs continue climbing at the rate they have.
"The most important thing is to start saving when your kids are young," says Deborah Fox of Fox College Funding in San Diego, which advises families on how to pay for college.
But even if you didn't start saving early, you can take some of the sting out of paying for college by participating in tax-saving programs. Consider these:
The workhorse. Start with a Section 529 college savings plan. It allows you to put away sizable amounts of money. Money in the account grows tax-free and no tax is owed if it's used toward qualifying college expenses. You can give $13,000 a year to any family member without having to pay gift tax, and the 529 allows you to deposit five years' worth of exclusions all at once. A married couple could potentially put $130,000 into the account ($13,000 x 5 x 2 = $130,000). If you choose a plan in your home state, you might be eligible for a state income tax deduction.
Tax credits. For families of lesser means, two tax credits are available. First is the Lifetime Learning Tax Credit of $2,000 for qualifying tuition and related expenses. The credit is phased out for singles earning between $51,000 and $61,000 a year and married couples filing jointly earning between $102,000 and $122,000, according to the Internal Revenue Service (IRS). In addition, the American Opportunity credit can be applied to $2,500 of the cost of tuition, books and course materials for the first four years of college per student. Income eligibility for the credit phases out at $80,000 for single filers and $160,000 for joint. You can't claim these credits for college expenses paid from money in a 529 or other tax-advantage account.
Tuition deduction. You may also be able to deduct $4,000 in tuition and fees if your income is below $65,000 for singles and $130,000 for married people filing jointly. This is an above-the-line deduction -- subtracted from your income before the adjusted gross income is calculated -- so you can take the deduction even if you don't itemize your taxes. Another bonus: the deduction lowers your adjusted gross income and could make you eligible for other deductions like medical expenses and unreimbursed employee expenses that are available to people below a certain income threshold.
Many more. There are additional programs and strategies that can lower your taxes as you save and pay for college. Most families will want to use a combination depending on their circumstances. Learn about your options at suntrusteducation.com.
Before investing, investors should consider whether their home state or their designated beneficiary's home state offers any state tax or any other benefits that are only available to residents of that state. Any state tax benefits associated with a 529 plan apply only to residents of the state sponsoring the plan. 529 plans value will fluctuate so that an investor's shares, when redeemed may be worth more or less than their original cost.
Investors should consider the investment objectives, risks, and charges and expenses of the plan carefully before investing. An official statement, which contains this and other important information, can be obtained from your financial professional. Please read carefully prior to investing.
Withdrawals may be subject to state income taxes depending on the participant's state of residence. Non-qualified withdrawals are subject to a 10% penalty.
Participation in a 529 plan does not guarantee that contributions and the investment return, if any, will be adequate to cover future tuition and other higher education expenses or that a beneficiary will be admitted to or permitted to continue to attend and institution of higher education.
SunTrust Banks, Inc., nor any of its affiliates underwrite 529 plans.
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