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Attorney Rydstrom Reveals 8 Tax Secrets to Education Savings Plans for 2004-2005

College education expenses have grown some 5% on average since 1990, outpacing inflation, which rose only 2.57% annually on average during the same period. Richard Rydstrom, Esq., of O'Connell and Rydstrom, says that, "Everyone can make a gift, free of gift tax, per tax year to a child, whether or not the donee is their child. The annual gift tax exclusion for 2004 is $11,000, meaning husband and wife may make $22,000 in gifts per year to one donee, free of estate and gift tax." In order to save people tax money, Mr. Rydstrom cites an 8-step checklist he devised and implements when discussing education planning:

1. The 529 QTP Education Plan: There are two types: One allows you to prepay qualified expenses; the other to contribute to a savings account to be used to pay qualified expenses. No income limits disqualify one from using a 529 Plan.

2. Coverdell Education Savings Account ("ESA"): A qualified savings plan to pay for qualifying elementary, secondary, and certain "higher education" expenses. It allows for K-12 payment of expenses, but not for a child 18 years or older, and the maximum contribution is $2000 per year per student.

3. Hope Credit: A credit for paid qualified educational expenses, not a deduction. A credit is the most tax effective reduction device. In 2004 the maximum credit is $1500 (per student).

4. Lifetime Learning Credit: In 2004 the LIFETIME maximum credit is $2000 per tax return, for all students (20% based upon $10,000 of qualified education expenses paid for all students).

5. Zero-Coupon Bonds ("Zeros"): One may consider alternative and/or supplemental investments (and integrated plans), such as the Zero-Coupon Bond (taxable and/or tax exempt versions), which is a bond that sells at a deep discount, or relatively inexpensive price, in relation to its face value.

6. The Kiddie Tax Factor: Remember that your child's income is not taxed at your higher rates until his or her investment income exceeds $1600 (2004), and only if your child is also under 14 years of age (for 2004, under age 14 on 01/01/05).

7. Warning Re: Financial Aid Considerations: Many colleges determine a family's need before granting financial aid, based on a formula which typically requires 35% of the student's assets to be considered when calculating how much to set aside for educational costs, compared with 5.65% of the parents' assets. See www.fafsa.ed.gov for more information.

8. TRUSTS: Assets held in certain trusts may not be considered available for education expenses for financial aid purposes.

Richard Ivar Rydstrom, Esq.: National Speaker / Attorney / Accountant / National Author / Dean of LLM, Taxation / Corporate LawFounder LiabilityCheckUp(TM)

Jenny Benford, J.D.: Legal Editor

This article is non-exhaustive, and not intended as, and may not be used as, legal, accounting, financial, tax, education or investment advice.