Fall must be just around the corner.  I just received my first friendly note for the Virginia Tech Bursar.  The note is friendly because the Bursar wants me to pay tuition and expenses for my Sophomore son.  It seems the Bursar only writes when he wants money.  I can't say that he is one of the people I look forward to receiving emails from.  So like many of you, I'm faced with college expenses...again.

Hopefully, you've saved and planned for college expenses or have sufficient disposable income to pay for the expenses.  But if faced with more college expenses than you'd like (whether you saved or not) there are ways you can soften the blow.

Take Advantage of Tax Breaks. 

Even if you have the money saved in a tax advantaged account like a 529 plan or a Coverdell Educational IRA you may want to pay some of your expenses with post tax dollars to take advantage of the tax breaks that may be available.  Many of these tax breaks are limited by Adjusted Gross Income (AGI) so you will want to carefully manage your income if you can.  Increasing your 401(k) contributions or selecting which year to take income from investments could keep your AGI below phase out limits.

The American Opportunity Credit.  The American Opportunity Credit is a dollar for dollar reduction in your taxes of up to $2,500.  The credit is based on 100% of the first $2,000 paid in tuition and qualified fees and 25% of the next $2,000 in tuition and fees.  The credit phases out between $160,000 and $180,000/$80,000 and $90,000 of AGI (Married/Single).  If your AGI is below the $160,000/$80,000 AGI limit you will definitely want to take advantage of this credit.  Even if you have a tax advantaged account, pay $2,000 of tuition and fees with after tax dollars (not from a 529 or Educational IRA).  You'll in effect get a $2,000 reduction in tuition.  You would also want to determine if it makes sense to pay the second $2,000 of tuition with post-tax dollars to receive the additional $500 credit -- This would depend on how much money you have in tax advantaged funds (remember under current law, this is the last year that the American Opportunity Credit will be available) and your tax bracket.

The Lifetime Learning Credit.  The Lifetime Learning Credit allows you to take a credit for 20% of the first $10,000 of qualified education expenses per year.  To qualify for the full credit, your AGI must be less than $122,000/$61,000 (Married/Single).  Unlike the American Opportunity Credit, the Lifetime Learning Credit may be used for education other than the first four years of post-secondary education (Post-Graduate, Job Skills Improvement). 

Student Loan Interest Deduction. You can deduct Student Loan Interest of up to $2,500 if your AGI is below $120,000/$60,000 (Married/Single).  The deduction phases out by $150,000/$75,000 (Married/Single).  There are two significant things with regard to this deduction.  First, the deduction is "above the line", which means you do not need to itemize to get this deduction.  And since this deduction is used to calculate AGI, it could potentially also increase your itemized deductions that are limited by AGI (Medical Expenses and Miscellaneous Deductions are two taxes that are limited by AGI).  Second, room and Board are considered qualified expenses for the Student Loan Interest Deduction and are not qualified expenses for the credits above.

Income Shifting.

Another thing you can do to reduce the sting of college expenses is to shift income to lower tax bracket individuals who then use the income to fund their education.

Gift Appreciated Assets.  Sometimes parents have appreciated assets that they plan to cash-in to pay for college expenses.  Instead of cashing the assets in, it may make more sense to gift the assets to the college student and let the student cash the assets in.  This scenario makes sense (for 2012 depending on what happens with the Bush Tax Cuts) if the parent is in the 25% or higher tax bracket and the student is in the 10% or 15% tax bracket.  In this scenario, the gains would be taxed at 15% for the parent and 0% if the college student cashes the assets in.  There are limits.  If the amount of gain exceeds $1,900, then the amount that exceeds the limit is taxed at the parent's rate.  This is the so-called the Kiddie Tax (The calculations are different if the child has earned income).  But if you can gift assets with $1,900 worth of long-term capital gains to your child, you're looking at a Federal Tax savings of $285.  Remember, though the total amount you can gift in a year without being subject to gift tax is limited.  Also, a gift is a gift...if Junior runs off to join the circus after you gift the asset, you can't do anything to get the asset or money back.

Use your business to shift income.  If you are self-employed or have a business, you can hire your college student to work for you and earn money for college.  Besides getting help with your business, the wages you pay to your child are deductible to you/your business and taxable income to your child.  Most likely your child is in a lower tax bracket than you are.  There are two things to watch for here.  First, the pay has to be reasonable (not too high and not too low).  Second, make sure that the Income Tax decrease is greater than the amount you will have to pay in payroll and other employment taxes.  This is probably only the case if the parent is in the 25% or higher bracket.

Look at State Tax Deductions

There may be opportunities to reduce your state tax bill as well.

Route your money through a 529 plan.  Once you have retired from the military and are no longer a Texas or Florida resident you have the joy of experiencing State Income Taxes.  You may be able to reduce your State Income Tax by contributing to a State Sponsored 529 plan.  Many states offer tax deductions or even credits for money contributed to 529 plans.  Some allow you to carry deductions forward if you contribute more than the amount you can deduct.  So, you might be able to contribute funds to a State Sponsored 529 and reduce your state income taxes for this year and for years to come.  The rules vary from state to state, so confirm that your state doesn't have a minimum time that the funds have to be invested in the 529 Plan or limitations if the child is currently a college student for the deductions/credits to apply.

GI Bill

Plan Your GI Bill Use.  If you qualify and have transferred your Post 9/11 GI Bill Benefits to your children you can of course use this to pay for college.  But before you split your benefits equally between your children take a look at the effects of scholarships and differing tuition levels.  For more information on this topic, see my blog post by clicking here.

Now, none of the techniques above are a Miracle Cure for College Expenses but they can help you keep a little bit more of your own money.  Take some time to sit down with your planner/tax advisor to see which options for paying for college result in the most money in your pocket when Junior gets the old sheep's skin.

What would you do if your child ended up in the hospital while off at college and was unable to communicate with you or the medical staff?  Once your child turns 18 you may be able to do less than you think you would.  Under the law, hospitals are not required to give you medical information and you may not be able to make medical decisions on your child's behalf.  The same goes for financial and legal decisions.  Avoid the additional stress and draw up the appropriate estate documents for your college student.  A Healthcare Power of Attorney/Advance Medical Directive and a Durable General Power of Attorney are probably the minimum.  See your attorney for more information...

When choosing the most advantageous charitable giving strategy, individuals must evaluate a number of factors, such as their need for current income, their desire to control and preserve assets during life and after death, their specific charitable intent, as well as important tax management issues. Charitable estate planning techniques can help achieve many of these objectives. Donor-advised funds, family foundations, and charitable remainder trusts (CRTs)/charitable lead trusts (CLTs) are available to individuals and their families. 

Donor-Advised Funds 

A family foundation derives its assets from the members of a single family, in which the donor and the donor's relatives play a significant role in managing the foundation.  Aside from helping channel their philanthropic ambitions, family foundations can form a legacy of community involvement and responsible citizenship for generations to come.  As their founders soon realize, family foundations offer potential tax and estate planning benefits.

Private Foundations Versus Supporting Organizations

There are two types of family foundations: private foundations and supporting organizations.  Private foundations, the more common of the two, offer more flexibility and control (i.e. they can select and oversee their own board of directors and grantmaking decisions), while supporting organizations enjoy more favorable tax treatment.

Gifts made to either type of family foundation are generally tax deductible from the donor's annual income tax, yet these deductions differ depending on the foundation's structure, the type of property or asset contributed, and the donor's income level.  As a general rule, all gifts to a family foundation are removed from the donor's estate, avoiding estate or gift taxes.

Balance Giving Goals and Financial Planning

While the tax benefits associated with charitable giving help reduce the cost of making charitable gifts, an individual's income or wealth transfer needs determine the ability to give.  To address both goals, vehicles such as CRTs or CLTs are available.

A CRT can guarantee a lifetime income stream for a donor and a spouse, while minimizing current income taxes.  Donors generally may deduct the fair market value of a charity's remainder interest in the CRT during the year the CRT is funded.  A CRT also can be an integral part of a family business succession plan.  A donor can transfer stock to a CRT, and a closely held corporation may redeem the shares.  The redemption funds the CRT with tax-free monies that subsequently can be invested to provide an income stream to the business owner an the spouse.

A CLT provides control over and enjoyment of a donor's assets during the donor's lifetime, and estate tax deduction at death equal to the present value of the charity's future income interest, and a legacy to family heirs with potentially little or no estate tax consequences.

Including charitable giving strategies within your estate plan can be an effective way for you and your family to enjoy an income stream during your lives, earn tax savings, and maintain a significant degree of control over assets.  Be sure to consult an attorney or a financial advisor who can help you identify the strategies that are most appropriate for your situation.

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Impact of Top Court's Ruling on Health Care Law 

On June 28, 2012, the U.S. Supreme Court handed down its long-awaited decision on the controversial health care law implemented by President Obama, the Patient Protection and Affordable Care Act of 2010 (PPACA) - widely known as "Obamacare." With the exception of an expanded Medicaid requirement on states, the nation's top court upheld the constitutionality of the law. So where do we go from here?  (To read more click here)

Do You Understand Investments?