Saving for your child’s college expenses is a priority for many parents. For US expatriates (U.S. citizens and green card holders), it is a good idea to review the available options that could be of benefit in providing for future college expenses. The TCJA changed or eliminated some of the tax benefits for those paying for or saving for college. The tax benefits available to US taxpayers vary depending upon circumstances; there are different benefits available if you are currently attending college, have completed college and are making payments on student loans or are a parent saving for your child’s education. This article will focus on benefits available when saving for college. It is important to know the difference between a credit and deduction. A tax credit may be refundable and directly reduces the amount of tax due. A deduction reduces the amount of income subject to tax, which indirectly could reduce the amount of tax due. There are college savings plans that allow either tax-free growth or tax-free distributions or both.
COVERDELL EDUCATION SAVINGS ACCOUNTS (ESA)
A Coverdell ESA is a custodial or trust account set up in the United States; it is used solely for paying qualified education expenses for a designated beneficiary. The TCJA did not change the rules governing this type of savings plan and it is still possible to continue making contributions to a Coverdell ESA or start a new one. Contributions are not deductible, but growth is tax-free. The maximum contribution is $2,000 per year. This amount is reduced if your modified adjusted gross income (MAGI) exceeds a threshold amount, currently $190,000 for joint filers. Distributions can be used for elementary, secondary and higher education expenses and are tax free if the distribution is less than the beneficiary’s qualified education expenses.
SECTION 529 PLANS
The TCJA expanded the types of expenses that can be paid using funds from a Section 529 plan. A Section 529 plan is a qualified tuition program that allows amounts to grow tax-free until distribution. Contributions are not deductible, but there is no annual limit on contributions for federal tax purposes, although states do provide limits, up to $520,000 in some states. As there are no MAGI limits as there are with the Coverdell account, this type of plan is more interesting to US expatriates.
It should be noted that contributions to a 529 plan are considered gifts and if more than $15,000 is contributed in a year to any one individual, a gift tax return may be required. However, there is a 5-year election available that allows you to make a larger contribution currently, utilizing the future year gift limits in current year. This allows you to contribute up to $75,000 to one person in
the current year without gift tax consequences.
The TCJA expanded the definition of qualified education expenses and a 529 plan can now be used to a limited extent for K-12 elementary and secondary school tuition for public, private and religious schools. Additionally, some US states provide a state tax benefit for a state 529 plan. The complexity of the provisions governing the variety of tax credits, tax deductions and savings plans can make it difficult to know the options available for college savings as well as the potential tax benefits of paying for college. We can help you determine the tax savings available to you based on your particular circumstances.
Learn more about these issues by searching for ‘Internal Revenue Bulletin: 2009-45’.
By Catherine K. Querio
Catherine is a Certified Public Accountant with over 15 years’ experience in taxation, business consulting and accounting. Her public accounting tax experience includes large corporate and partnership clients in tax compliance and planning, as well as consulting. Catherine attained her CPA qualification with a Michigan firm and spent 12 years in public accounting before moving into industry. She advised partnerships on consolidation of accounting records and as financial controller for an early stage energy company assisted in successful venture capital financing and the development of an internal control structure. She joined US Tax & Financial Services in 2014 and is based in our Geneva office. Her clients include trusts, funds and private equity partnerships. She is experienced in the preparation of US tax returns and has broad technical knowledge of issues faced by US citizens living abroad. She is also experienced in the application of the IRC and Swiss-US double tax treaty for items of income and expense.
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