School will soon be back in session for Fall of 2021. Parents and students alike are anticipating the return to classes in person with little to no remote classes and doing so with much enthusiasm. The pandemic certainly has brought the importance of the educational experience to the forefront. As such, this is an ideal time to share some important reminders for those saving for higher education, applying for financial aid and entering college this coming fall.
For many American students and their families, financing higher education comes from multiple sources. These may include financial aid, scholarships & grants, 529 plans and traditional savings accounts & investments. Each of these elements has various pros and cons. The Free Application for Federal Student Aid (FAFSA) is usually the first step and the key component in seeking financial aid and is the form schools will use to determine how much money to offer the student for college and the types of aid one can qualify for. The application opens October 1, 2021 if enrolling for the 2022-2023 school year. The FAFSA application needs to be completed every year if you are seeking federal aid and can be found here: FAFSA Application
A great option available to parents to save for education costs is a 529 plan. The 529 plan is an education savings plan in which the earnings grow tax-free and contributions are not taxed when the funds are withdrawn if used to pay for qualifying education expenses. Additionally, if you are a New York State resident and an account owner, you may be able to deduct $5,000 ($10,000 if married filing jointly) of your contributions annually when filing your state income tax return. Currently, there is no federal tax deduction for contributions to 529 plans. An interesting strategy not as well known is there is “no waiting period for withdrawals” in many states, including New York. Essentially, this means that a contribution can be made to claim the state tax deduction and then immediately withdrawn in the same year to pay for qualified education expenses. Lastly, qualified education expenses include: tuition and fees; college room and board; books; supplies; computers; internet access; registered apprenticeship program expenses; tuition and fees for K-12 schools (up to $10,000 per year); and up to $10,000 in student loan debt repayment. A 10 percent penalty plus income taxes will be imposed if the funds are withdrawn for a reason other than the uses noted above.
Like many aspects of planning for higher education, the various scholarships available to students entering college could lend themselves to a full-length article. There are thousands of scholarships available, for nearly every interest, hobby, sport and academic achievement. Needless to say, scholarships can lessen the burden of rising tuition costs, provide students with more time to focus on studies, and reduce the amount of student loans needed to complete higher education.
Please do not hesitate to contact your TSA tax advisor to discuss in more detail the vast education planning options available to parents and students. Or, contact Lisa Mrkall, CPA, MBA, Principal, Small Business Department, at lmrkall@tsacpa.com or 716.633.1373.
