Tax Considerations

Even if you invest wisely and defer the tax liability on savings for your child's college fund, you'll have to come up with the taxes when you liquidate those investments. Chances are you'll be faced with taxes at a time in the future when you are likely to be in a higher tax bracket and have other additional expenses. You'll need to be sure your investments earn enough to cover the anticipated taxes.

It's important to note, too, that tax laws are constantly changing. Consult your tax advisor before you begin investing, then check back regularly. If tax law changes negatively affect your college investments, you may want to move the money. How and when you move the funds also can affect taxes, so be sure to talk to your tax advisor first.

Here are just a few examples of tax considerations affecting college funds:

• Loans. If you plan to take out a loan to help pay for your child's college expenses, the interest may now be deductible. Generally, if the taxpayer's adjusted gross income is below $60,000 for joint filers and below $40,000 for single filers the following interest may be deductible. The deduction is phased out ratably from $40,000 to $55,000 for single filers and from $60,000 to $75,000 for joint filers.
• Deductions. A deduction may be claimed only on interest paid during the first 60 months in which interest is owed. Students may claim this deduction only if they are not claimed as dependents on parent's returns.
• UGMA accounts. You can put assets in a Uniform Gift to Minors Act (UGMA) custodial account for a child. However, if the child is under age 14, all income earned by these assets above a certain level (determined annually by the IRS) is taxed at the parents' income rate, whether or not the parent is the custodian. For children 14 years old and older, the income on assets in a UGMA account is generally taxed at the child's rate. You should keep in mind that putting assets in your child's name may reduce the amount of financial aid he or she is eligible to receive.