Monday, February 9, 2015

The Tax-Smart Way to Draw ‘529’ Funds / How to Be Sure You Don’t Miss Other Tax Breaks for College Expenses

Andrea Coombes for the Wall St Journal writes: If you have a college-tuition bill coming due this year and plan to pay it all with money from a 529 savings account, you might be missing out on some valuable tax benefits.

Americans are pouring billions of dollars into 529 college-savings plans—more than $221 billion was invested in these plans as of mid-2014, up from $52 billion a decade earlier, according to the Investment Company Institute, a mutual-fund trade group.
The plans are popular because earnings grow and are distributed tax-free if the money is spent on qualified education expenses. (A recent proposal from President Barack Obama to curtail the tax benefits of new contributions to 529 plans was withdrawn quickly.)
But there are other tax breaks available for college expenses, for those who qualify based on their income. You can’t claim them, though, for expenses you cover with money from a 529 plan.
So if you are eligible for these other credits, “a big tax-planning mistake would be to take the total education expenses and withdraw that from the 529 plan,” says Tom Fredrickson, founder of Fredrickson Financial Planning in New York.
Figuring out whether you qualify for various tax breaks will help you determine which expenses to pay with money from your 529 account and which expenses to pay out of regular savings, cash flow or loans.
Big Opportunity
Three of the most valuable tax benefits for education are the American Opportunity tax credit, Lifetime Learning credit, and tuition-and-fees deduction. The tuition-and-fees deduction has expired for 2015, but it’s a provision that Congress tends to resuscitate at year-end. (It had also expired for 2014 but was extended in December.)
These three are mutually exclusive, meaning you can’t use more than one per student. For most eligible taxpayers, the American Opportunity credit is the most valuable, says Mark Kantrowitz, senior vice president and publisher of, a consumer-information website based in Las Vegas. SNIP.  The article continues at the Wall St Journal, click here to continue reading....