Tax deductions can be a real incentive when you need to help your children plan for how to pay for college. There are several types of college savings accounts that are available, and it is best to talk with a qualified accountant to pick the best savings plan for your needs.
Coverdell Educational Savings Accounts (ESA)
If you choose a Coverdell Education Savings Account (ESA), the yearly contributions are limited to $2,000 total. When the distributions are made, the beneficiary is not required to pay taxes on the payouts, but the distributions cannot be more than the qualified educational expenses. These distributions can be used for both higher education costs, such as college or university, as well as lower education, including elementary and secondary education costs.
529 College Savings Plan
A 529 Plan is operated by an educational institution or a state, and the funds in these savings plans can be used to pay for the costs of qualified colleges and universities. In most situations, your school selection isn't impacted by the state in which your 529 originated, so you can choose a college located out of state if you prefer.
Most states offer tax benefits on 529 Plans, as long as the program meets a few requirements. These programs provide some of the best options for tax breaks on both a federal and a state level. For example, the investment grows tax-deferred, which means that the distributions come out of the investment account federally tax-free. The state-level tax deductions vary by location, so you should talk with a qualified accountant to learn about educational savings plan tax deductions in your area.
There are pros and cons to Coverdell Educational Savings Accounts as well as 529 College Savings Plans. So, it is always best to consult with a qualified financial advisor who can assess your individual situation and make recommendations for tax savings strategies that meet your needs.
At Charles P Myrick CPA, we guide our clients through a full range of tax planning and preparation decisions with strategies that minimize your tax liabilities, maximize your cash flow and keep you on track to your financial goals. Contact us for information about our tax preparation services.