Save Money For Back To School Expenses

Tuesday Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

“I have to pay some school expenses. What do you suggest?”

As an accountant, I hear this question all the time. Luckily, there are a number of ways to pay for tuition, books, et cetera. Here’s the rundown:

  1. First, do you have any US Savings Bonds? Generally the interest is Federally taxable unless you meet these exceptions:
    1. The bonds were purchased after 1989
    2. You were over 23 years over when purchased
    3. The money is used for higher educational costs
    4. The money is used for you, your spouse, or a dependent, and
    5. You meet the income and phaseout limitations: $105,000 – $135,100 for marrieds; $70,100 – $85,100 for others.
  2. How about using the money in your 529 plan? Use it tuition, room and board, fees, books, supplies, and equipment. Plus, through the end of 2010, use 529 money for a computer and internet expenses. No 529 money? Contribute now – today – and withdraw the funds in two weeks. You still get a State tax deduction, at least in New York. (Sorry, not in New Jersey.)
  3. Did you open a Coverdell ESA? Use these funds for either post high school or for primary and secondary school, at least through December 31. Expenses include tuition, fees, tutoring, expenses for special needs children, books, supplies, computers, room & board, uniforms, and transportation. The allowance is very broad as you can see.
  4. My favorite: get a scholarship or fellowship, including a Pell grant, to cover tuition, fees, books, and equipment. Free is always good; and it’s for you if you are an athlete, musician, nerd, or have financial problems. And not only can it be free to you, it’s not taxable! Note though that free money for room and board and travel expenses are taxable. Hey, take what you can get.
  5. Use your Traditional IRA money. I don’t approve of this, but it is available. The funds you withdraw are taxable, but not subject to the 10% early distribution penalty for those under 59 ½. (There are some twists and turns here like if some of the money was not deductible on your tax return, or it you’re taking it from a Roth IRA. Check it out with your tax advisor.)
  6. Let your boss pay. Work it out. Up to $5,250 is tax free if your job has a qualified educational assistance program. And if the classes are job-related, all your education and training is considered a tax-free fringe benefit.
  7. And finally, don’t forget the Hope and Lifetime credits which can reduce your income tax, and may even result in a refund!

America, land of the free.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.