Saving For College – 2021 - CPA Clinics
Assets in a custodial account belong to the minor. Any income earned in a custodial account is taxed to the minor. A custodian, usually an adult relative, controls the assets until the minor reaches the age set by state law (21 in most states).
Assets in a custodial account can be used to pay for education expenses for the minor.
Interest from qualified savings bonds redeemed by the taxpayer can be excluded from income if:
If proceeds from the redemption (interest and principal) are more than adjusted qualified education expenses, only a percentage of the interest is excludable.
Example: Marty redeemed qualified bonds for $10,000, including accrued interest of $5,500. He paid $8,000 of qualified education expenses during the year. His excludable interest is:
$5,500 interest × $8,000 qualified expenses/$10,000 redemption proceeds = $4,400 tax-free interest
The exclusion is limited by adjusted gross income. Check with your tax professional for income limitations.
Contributions to a QTP or ESA are not deductible. Earnings accumulate tax free. Distributions are not taxable if less than the beneficiary’s adjusted qualified education expenses in the year of distribution. Contributors can contribute to both a QTP and an ESA in the same year for the same designated beneficiary.
Note: QTPs are also called college savings plans or 529 plans.
Did You Know? Most colleges and universities set room and board allowances for students who live on campus, off campus, and with parents. Check the school’s financial aid website for costs of attendance.
QTPs. For QTPs, the following expenses are considered qualifying expenses:
Apprenticeship expenses. Expenses paid for books, fees, supplies, and equipment required for the participation in a registered apprenticeship program.
Student loan repayment. Principal or interest payments on any qualified education loan of the beneficiary or sibling up to a cumulative maximum of $10,000 per beneficiary and sibling.
K–12 education. Expenses for enrollment or attendance at any public, private, or religious school that provides K–12 education as determined under state law. Qualified K-12 tuition expenses may not exceed $10,000 per beneficiary per year.
ESAs. For ESAs, the following expenses qualify:
Qualified expenses are reduced by: