By Michael Ohanesian at AICPA on September 21, 2018
Your clients are ecstatic. Their daughter just got accepted to an Ivy League college. But they’re also worried because that top tier school is expensive. Concern doubles when they think about their 15-year-old son who just started at a private high school. He’ll be looking at colleges soon, too.
Many parents feel financial pressure when it comes to their children’s education. That’s not surprising considering that in 2016, the yearly estimated average cost of undergraduate tuition, fees, room and board was $16,757 at public institutions, $43,065 at private nonprofit institutions and $23,776 at private, for-profit institutions.
What can you as a tax practitioner do to prepare your clients for this financial milestone? Below, you’ll find four suggested talking points to put your clients’ minds at ease.
Discuss Coverdell Education Savings Accounts and changes to qualified tuition programs (QTPs)
Clients who have QTPs (529 plans) or Coverdell Education Savings Accounts (ESAs) may find that tax reform has changed how they’ll use these funds. So, you’ll need to discuss the pros and cons of each type of plan to ensure they’re still getting the most bang for their buck.
One benefit resulting from the new tax bill is that 529 plans can now be used to cover tuition at private K-12 schools up to $10,000 each year per beneficiary. That’s great news for parents with kids in private elementary and high schools, but your clients need to be aware of the downside of using these funds early. The longer the funds stay within the plan, the more growth opportunities the money will have.
While both ESAs and 529 plans are good ways to save money for education costs, ESAs can allow for more adaptability, such as very flexible investment choices. The downside of ESAs is that they are subject to higher income restrictions. Benefits phase out completely for joint filers for modified adjusted gross incomes (MAGI) of $220,000 — $110,000 for single filers — or above. Corporations and other such entities can make contributions to ESAs without income restrictions. Also note, the total amount of contributions to these ESAs cannot exceed $2,000 per year, while 529 plans are only limited to the amount necessary to provide qualified education expenses. Make sure your clients understand that there may be gift tax consequence if these contributions exceed $15,000 during the year.
Regardless of which option best fits your clients’ needs, encourage them to shop around to minimize fees.