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HOT tips for college saving

We’re going to be talking about different types of ways to save for college, whether that be for you or for someone else. But first, let’s take a look at different types of ways that you can save.

Bank Custodial Accounts: Assets in a bank custodial account belongs to the minor. A custodian, usually an adult relative, controls the assets until the minor reaches the age set by state law (21 in most states). Assets in a custodial account can be used to pay for education expenses for the minor.

Savings Bonds: Interest from qualified savings bonds redeemed by the taxpayer can be excluded from income if:

The taxpayer paid qualified education expenses during the year for the taxpayer, spouse, or a dependent claimed on the taxpayer’s return.

Filing status is not Married Filing Separate. If proceeds from the redemption (interest and principal) are more than adjusted qualified education expenses, only a percentage of the interest is excludable.

Ex. Dean redeemed qualified bonds for $10,000, including accrued interest of $5,500. He paid $8,000 of qualified education expenses during the year. His excludable interest is: $5,500(interest) X $8,000(qualified expenses)/$10,000(redemption proceeds) = $4,400(tax-free interest)

Education Savings Bonds: An education savings bond program allows qualified taxpayers to exempt all or a portion of interest earned upon redemption of eligible savings bonds from their annual gross income. To qualify for this program, savings bonds must be Series EE or Series I bonds issued after 1989 and are subject to the following conditions:

The bonds must be Series EE bonds issued after 1989 and Series I bonds.

They must be issued to a person who was age 24 before the bond’s issue date. The issue date is the first day of the month in which the bond was purchased (for example, a bond purchased on May 25 has a May 1 issue date). The issue date is printed on the front of the bond.

The bonds must be issued in the name of the taxpayer and/or spouse. There can be no other co-owners, including the taxpayer’s child. The bond can have a pay‑on-death (POD) beneficiary, including a child.

Now, when the college savings are used for educational expenses, those expenses must be qualified education expenses, such as tuition and fees required for enrollment or attendance at an eligible educational institution. Qualified expenses do not include courses involving sports, games, or hobbies, unless part of the student’s degree program.

Contributions to a qualified tuition program or contributions to a Coverdell education savings account can be used for the following educational expenses:

Tuition, fees, books, supplies, and equipment required for enrollment or attendance of the designated beneficiary at an eligible institution.

Expenses for special needs services of a beneficiary with special needs incurred in connection with enrollment or attendance.

Room and board for students enrolled at least half time in a degree or certificate program. Expenses are limited to the room and board allowance included in the cost of attendance set by the school for financial aid purposes or the actual cost of campus housing, if greater.

 Did You Know?

Most colleges and universities set room and board allowances for students who live on campus, off campus, and with parents. Check the school’s financial aid website for costs of attendance. For ESAs (education savings accounts), the following additional expenses are allowed:

Tuition, fees, books, supplies and equipment, academic tutoring, special needs services.

Room and board, uniforms, transportation, supplementary items and services, including extended day programs if required or provided by the school.

Purchase of computer technology, equipment, or internet access and related services to be used by the beneficiary and family during elementary or secondary school years. Does not include computer software unless predominantly educational. Expenses for enrollment or attendance at any public, private, or religious school that provides K– 12 education as determined under state law.

Contributions to QTPs (qualified tuition program) for the designated beneficiary.

Contributions to a QTP (529 Plan) or ESA (Educational Savings Account) are not deductible on your Federal or State of North Carolina income tax return, but earnings accumulate tax free. Distributions are not taxable if the distribution is less than the beneficiary’s adjusted qualified education expenses in the year of distribution. Contributors can contribute to both a QTP and an ESA in the same year for the same designated beneficiary.

To find out if you’re on track with your college savings plans, Rukosky & Associates can help! Schedule an appointment with us today by clicking here.

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