Our son (the oldest of our three children) will be a college freshman in the fall. We?re looking for creative ways to help pay for the rising costs of college tuition. As business owners and parents we?re trying to take advantage of all our options.
We also have a daughter that will be a high school senior in the fall and are keenly aware of the rising costs of college (we feel your pain!) The good news is that there are several tax benefits (credits and deductions) that can help offset college costs depending on your situation and income level. Since you have a family business there may be even greater opportunities to help take the sting out of skyrocketing college expenses.
As a business owner you have a unique opportunity to help pay for college if your children perform services for your organization. You get a tax deduction for reasonable compensation paid to your child and he or she will only pay taxes on their earnings to the extent they exceed $5,950 in 2012. Even if your children earn more than the excludable amount, the earnings will most likely be taxed at a rate that is lower than your tax rate. Your child can save a portion or all of these earnings to help pay for future college costs.
If your company is unincorporated (an LLC or sole proprietorship) and your children are under the age of 18, you will receive an even greater tax advantage since their wages will not be subject to Social Security (FICA) or FUTA taxes.
Hiring your children also gives you the opportunity to reinforce the importance of being financially responsible, as well as the relationship between work and money. These life lessons are critical, especially for your son that is heading off to college. If your succession plan includes bringing your children into the business, this could be a great way to start.
There are several other education tax benefits and deductions that Uncle Sam makes available to qualifying families to help offset college expenses; however, many of these are limited based on your adjusted gross income.
The American Opportunity Credit (AOC) has been extended through 2012 and can be worth as much as $2,500 per eligible student. The catch is the credit is only available during the first four years of post-secondary education for any one student. Forty percent of the credit is refundable, which means you may be able to receive up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment (not room and board). The full credit is generally available to eligible taxpayers whose modified adjusted gross income (AGI) is below $80,000 ($160,000 for married couples filing a joint return) but phases out completely when modified AGI reaches $90,000 ($180,000 for joint filers).
In 2013, the American Opportunity Credit will no longer be available unless it is extended through legislation. Instead, taxpayers can take advantage of the Hope Credit which is substantially similar to the AOC except its only available for the first
two
years of post-secondary education, is limited to $1,500, and no portion of the credit is refundable.
The Lifetime Learning Credit can save you up to $2,000 in taxes and is less restrictive than the American Opportunity Credit. The credit is equal to 20% of the first $10,000 of qualifying educational expenses for a student enrolled in eligible educational institutions. This credit is generally intended to help those who are not eligible for the American Opportunity Credit. There is no limit on the number of years you can claim the Lifetime Learning Credit. Graduate level courses as well as certain professional development and training classes can qualify. This credit, however, is also limited if your modified adjusted AGI exceeds $52,000 ($104,000 if married filing jointly).
Personal interest you pay, other than certain mortgage interest, is generally not deductible. However, if your modified AGI is less than $75,000 ($155,000 if filing a joint return), you may be able to deduct interest paid on a student loan used for higher education during the year. This deduction can reduce the amount of your income subject to tax by up to $2,500.
Depending on the ages of your two younger children, you may want to consider a state-sponsored college savings plan (often referred to as a 529 plan) to help fund the cost of their educations. Contributions to a 529 plan are not eligible for a federal tax deduction. However, certain states, including Ohio, provide state tax benefits.
The rules can be complicated so be sure that you work with a knowledgeable professional to maximize the tax savings to make decisions that are most beneficial for you and your family. You can get more information regarding the tax benefits of education expenses by referring to IRS Publication 970 at http://www.irs.gov/.
Tom Cooney and Crystal Faulkner are partners with Cooney Faulkner & Stevens, LLC, a CPA firm serving clients as a business advisor and advocate by providing innovative solutions for today?s most challenging problems. Client Focused Solutions for Businesses and Families. For additional information call 513-768-6796 or visit us at http://www.cfscpa.com/.
