Market Beat: Paying for college tuition
TRUCKEE, Calif. andamp;#8212; College tuition costs have risen rapidly in the last few years, far outpacing the rate of inflation. College costs have been rising at about one and a half to two times the inflation rate going all the way back to 1958. When planning for college, you should assume that the tuition costs will continue to rise and a probably at a rate of about 8 percent per year as they have done over the last several years.Itandamp;#8217;s important to take advantage of every tax break that you can when paying for college. If the student is fortunate enough to have a family who is capable of paying, funds used to pay for college tuition are free from gift tax. So, if the grandparents have a sizable estate, they can pay for tuition directly and those funds are not subject to gift tax. The money canandamp;#8217;t be for room and board or other expenses; it has to be for tuition only and must be paid directly to the college or university.If your children are young and you are starting to save, a 529 plan can give several advantages. A 529 college savings plan allows you to save on a tax favored basis, like an IRA account, and then use those funds once they have accumulated to pay college costs without paying tax on the gains in the account.Parents should also take advantage of the American Opportunity Tax Credit, which can give you a credit of up to $2,500 on your 2012 return. To qualify for the credit, your income must be below $180,000 and you need to pay the tuition costs from a checking, savings or taxable investment account.If you also have a 529, you should pay $4,000 from the taxable account and pay other expenses separately from the 529 to get the tax credit. Parents who earn less than $150,000 can also deduct $2,500 a year in student loan interest from their taxable income.With college costs on the rise as they are, careful planning can yield some substantial savings.Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at http://www.fusiontargetretirement.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.