Plan No. 1
U.S. Savings Bonds (Series EE issued after 1989 or Series I).
You can exclude all of the interest income that accrues on these bonds if
you, as the parent of your child:
If you are married
and file a joint return in 2006, this benefit phases out when
your income is between $94,700 and $124,700. For all other
tax returns, the benefit phases out between $63,100 and $78,100.
- Pay qualified
higher education expenses (tuition and fees) in the year of
not file your tax return as married-filing-separately, and
- Your income is
not too high.
bonds must be in the your name, not in the name of your child.
You must buy the bonds, not a relative or family friend.
your child is in college, you canít claim an exemption for any
bonds that exceed the cost of the education. For example, if
that yearís educational costs total $10,000, thatís the most
you can cash in and declare exempt for taxes. To avoid this
problem, buy bonds in increments you expect will not exceed the
annual costs of education.
Plan No. 2
Regular Investment Account
General -- Invest
money in the name and social security number of your child.
Investment income of children is taxed at lower rates (within
limits). Investment income is interest, dividends, capital
gains and losses, royalties and rent. The child's tax rate
depends upon their age.
under age 18 -- The
first $850 of investment income is tax-free. The next $850
is taxed at 10%. Investment income after this is taxed at
the parent's marginal tax rate (this is known as the "kiddie
tax"). If your child owes a tax you may be able to
report it on your tax return without filing a tax return for
the child. To see if you qualify to report your child's
income on your tax return see the instructions to Form 8814.
Children age 18 and older
first $850 of investment income is tax-free. The next $7,300
is taxed at 10%, and so on according to the tax rates for single individuals. The "kiddie tax" does not
apply. If a tax is due, the child will need to file a tax
-- If you begin early, your child will be able to accumulate a sizable sum of money tax-free,
or at very low rates. These funds are then available to pay
for education costs, or for any other purpose for that matter.
Plan No. 3
Coverdell Education Savings Account
up to $2,000 per year to a Coverdell Education Savings Account (ESA)
for beneficiaries under age 18 (and special needs beneficiaries of
any age). These accounts were formerly
known as an Education IRAs.
Earnings in these accounts are
not taxed if withdrawals are used for education purposes.
Anyone, including Grandparents, can put money into these
accounts. However, not more than $2,000 can be put into the account of
any one child for any one year.
you are married and filing a joint return the $2,000 limit is
phased out for income levels between $190,000 and $220,000.
For all others the phase out is for income levels between $95,000
because the parents cannot make a contribution because their
income level has phased them out, doesn't mean that the
grandparents or someone else is not eligible to make a
Plan No. 4
General -- Contribute
to a state sponsored Qualified Tuition Program (QTP), or eligible
educational institution sponsored QTP. There are two types of 529 Plans--a prepaid
tuition plan and a savings
the Prepaid Plan -- a parent, grandparent, or other qualifying
taxpayer purchases tuition credits to lock in current rates.
The credits are used later when the student starts college.
Under the Savings Plan
-- an account is set up and funded each
year. The account grows tax-free and funds are withdrawn
tax-free when the student begins college. Large sums
of money can be put into these plans. Taxpayers wanting to
gift out of their estate to fund the savings plan may do so for an
amount up to $55,000 for the current year and avoid gift
tax. Broker fees and plan
expenses may be assessed.
Rules -- The federal government places some
limitations on these plans (see table below). States
that sponsor these plans have additional limitations that vary from state to state.
Caution - Content on this page is
general in nature. More specific rules and limitations may apply
to your situation. Always seek the advice of a tax professional
before making important financial decisions.