Regardless of how old your child or children may be, consider these options for saving the money it's going to cost to send them to college:
1. Gifts made to family limited partnerships or irrevocable trusts allow the income from the property to be accumulated and distributed later when needed for college.
2. Education IRAs allow nondeductible cash contributions of up to $500 per year per child. The accounts are tax exempt and distributions are tax free, providing they are used for educational purposes by age 30.
3. Custodial accounts can be established under the state Uniform Gifts to Minors Act to hold gifts of security and money. Of the income generated by the assets, $1,400 is taxed to the children.
4. Make tax-favored investments and put money in municipal bonds, real estate, specific types of life insurance and low-dividend, high-growth-potential stocks. You can minimize taxable income and still retain control of the assets.
5. If the school choice is known, invest in a rental property close to campus. Collecting rent is considered business income, making the interest and other related expenses tax deductible. Hire your child as the manager and deduct the salary you pay him or her (as long as it's reasonable). There is no FICA tax as long as you own the property personally, rather than in trust. Plus, your child may get in-state tuition rates without having to worry about finding a place to live.
6. Look into federal and college financial aid formulas. If there's any chance your child will be eligible for aid, you need to start planning to qualify-which might mean sheltering some assets-before January of the child's junior year in high school.
7. Two new tax credits apply for 1998 and beyond. The credits are more advantageous than deductions, since they reduce tax liability dollar for dollar. However, you cannot take both of these credits in the same calendar year or in a year in which you take a tax-free distribution from an education IRA.
The HOPE credit allows a 100 percent credit of the first $1,000 of education expenses, and 50 percent of the next $1,000, allowing up to $1,500 per student per year. It is only applicable for a student's first two years of post-secondary education.
The Lifetime Learning Credit can be used for an unlimited number of years and applies to undergraduate, graduate or continuing-education expenses. A taxpayer can receive 20 percent of tuition and fees up to $5,000, or a total of $1,000 per year, regardless of the number of students in the family.
8. Interest due and paid after 1997 on a higher-education loan can be taken as a tax deduction. The maximum deduction is limited to $1,000 in 1998 and increases annually by $500, before capping at $2,500 in 2001.
No matter what your situation, the time to act is now. Being prepared and staying informed is the best way for you to survive those grand old college days without having a major financial hangover.
Linda Tracy Gill, CPA, is a director at SS&G Financial Services Inc., with offices across Ohio, including Akron and Cleveland. You can reach Gill by e-mail at lgill@SSandG.com.