The government likes to pat itself on the shoulder anytime it sort of gets things right. This year, post-tax season, they’re preening over the new, free IRS Direct File program.
It did come in under budget and seemed to work for the scanty 114K people who used it, I’ll give them that.
But critics are asking why they needed to build their own platform when similar platforms already exist. Why the need to use budget for this anyway? A fair question.
And… whether or not Direct File with the IRS is the best option for taxpayers is maybe the more pertinent “metric” to pay attention to. After all, Uncle Sam is generally more focused on getting paid than saving you money on your taxes.
For us here at M Dean Owen, CPA, PSC, that’s one of our top goals for our Paducah clients. It’s why we work beyond tax season to help you make the kind of moves that position you better when tax season inevitably comes back around.
With seven months left in 2024, there’s plenty of time to make strategy pay, and there are plenty of tax strategies to discuss! When you’re ready, I’m right here:
Last week I talked about what you need to get in order for the big G: graduation. Lots of graduation events coming up in the next month. But this week, I want to focus on the financial burden of helping your child pay for college. It’s something that weighs on many a parent’s mind.
As a reliable McCracken County tax professional in your corner, I want to bring before you a tax strategy to boost your college-saving endeavors — one with flexibility and great benefits. It’s called the 529 college savings plan.
529 College Savings Plan: The Tax Savvy Option for Paducah Families
“Start where you are. Use what you have. Do what you can.” – Arthur Ashe
College costs have risen significantly in the last 10 years. Average tuition fees per year at private colleges are around 41K and around 11K in public universities. That doesn’t include textbook costs or simple living costs like rent, food, gas, and phone.
And while that price hike has been linked to waning interest in sending kids off to college, there’s still a lot of compelling research out there about why a college education is a good thing.
As a parent (or maybe you’re a grandparent) with pro-college plans, reducing the financial burden for your child as much as possible is an obvious win. But putting the money in a general savings account might not be the most optimal approach.
Why? Because you have a better option.
This is where a 529 college savings plan (or qualified tuition program, according to the IRS) comes in. These were specifically created to help parents just like you save money for your kid’s college while also saving on your tax liability.
Also important is that these plans are mostly considered the account owner’s asset (that’s you), not the beneficiary’s (usually the student). Why does this matter? When it comes time for financial aid, this little detail can mean more aid for your child. Fewer assets in their name means potentially more aid eligibility.
So, you can pour money into the 529 plan, watch it grow tax-free, and then withdraw it tax-free — provided you use it for qualified educational expenses like tuition, books, or even room and board.
And guess what? 529 plans have become super flexible over time. Beyond college expenses, you can now use these funds for K-12 tuition, certain apprenticeship programs, and even using them to pay off student loans.
Note: Contributions to a 529 plan are not deductible on federal tax returns. However, the investment does grow tax-deferred, and distributions used to pay for qualified education expenses are federally tax-free.
So, what other benefits are there to a 529 college savings plan?
1. Over 30 states, including the District of Columbia, offer a state income tax deduction or credit for contributions made to a 529 plan, which could potentially lower your taxable income each year you contribute.
2. A 529 college savings plan allows you to contribute up to 18K per year per beneficiary. Additionally, there’s an option to “superfund” the account with up to 90K at once, spread over five years for gift tax purposes. This can be a game-changer for grandparents or relatives looking to help out. Plus, it maximizes the potential for compounding growth while also providing an excellent estate planning strategy, where you can reduce your taxable estate while setting aside significant funds.
3. The investment options within 529 plans are also designed to be user-friendly, often featuring age-based portfolios that automatically adjust as the beneficiary gets closer to college age.
4. Starting and managing is fairly simple. Most plans allow you to set up automatic contributions from your bank account. Then you can choose from a variety of investment options depending on how conservative or aggressive you want to be.
5. The plans are also incredibly flexible. If your child decides not to go to college, you can name another family member as the beneficiary and keep the educational dream alive within your family.
Now, the earlier you get started with a 529 college savings plan, the better. If you invested just 200/month from the time your child is born, you could grow their college savings to about 76K by the time the child turns 18 (assuming a 6 percent annual return).
This could cover a significant portion of college costs and that means less debt for your child later on.
Is this making you consider a 529 college savings plan as one of your family’s future education strategies? If so, let’s get something scheduled to determine how you can best leverage it and maximize your educational saving efforts.
Looking ahead with you,
Dean Owen
