529 Plan, and/or Lifetime Learning Credit?

[mithrin]

I'm trying to do some tax planning for next year. My wife is taking online classes for a masters degree, so I'm trying to figure out the best way to handle her education expenses tax-wise.

We are in the 15% tax bracket, so the Lifetime Learning credit seems like the best option for the 20% credit.

I've also been looking at 529 plans. Colorado allows a state deduction for 529 contributions--with no limit on contributions. It appears the 529 plan can be used for some expenses, namely room and board, that don't count toward the Lifetime Learning credit. Also, her qualified tuition and fees may exceed the 10K maximum for the LL credit this year.

When I asked my tax preparer, she pointed out that the LL credit was better for those expenses that qualified, but then she emailed me the following day and said that 529 plans do not allow contributions for beneficiaries over 18. I cannot find any age restrictions on contributions on the IRS site, or on the harder to navigate Colorado site. The 529 plan documents say the beneficiary may be any age and that contributions are state tax deductible (though subject to recapture if used for non-qualified expenses).

My plan was to use the LL credit for the first 10K of qualified expenses, and open a 529 plan, and make contributions and withdrawals (within the same year) to cover any qualified expenses beyond 10K, as well as to make use of the slightly expanded list of qualified expenses that a 529 plan has compared to the LL credit--most significantly room and board. The 529 plan would not give me any federal tax benefits, but I would deduct the amount of contributions from my state income tax, so save the 4.6% state tax rate.

Any tax experts familiar with 529s out there who can tell me if I'm missing something, or if my tax preparer is mistaken about the beneficiary having to be under 18? Can I claim room and board expenses (up to the limit of the colleges estimated cost of attendance) even if my wife is taken online classes from an out-of-state university?

[mwcpa]

if she is taking classes on line what room and board are you looking to deduct....I assume she is home.....

From IRS.gov (Publication 970 (2010), Tax Benefits for Education) www.irs.gov/publications/p970/index.html

"Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts.

The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution."

In regards to the allowable contribution limit to a 529, from the same IRS publicaiton

"Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. There are no income restrictions on the individual contributors. "

[cpadvisor]

Mar 17, 2011 18:32:47 GMT -5 mwcpa said:

if she is taking classes on line what room and board are you looking to deduct....I assume she is home.....

From IRS.gov (Publication 970 (2010), Tax Benefits for Education) www.irs.gov/publications/p970/index.html

"Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts.

The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution."

In regards to the allowable contribution limit to a 529, from the same IRS publicaiton

"Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. There are no income restrictions on the individual contributors. "

In other words, if she enrolled at least half-time, they can use the 529 proceeds for her off-campus room & board up to the "allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student."

[mithrin]

That is how I interpreted it as well--treat it the same as if she were an off-campus student (though she is a little further off campus than usual). The school's website lists their room and board estimate for 9 months as 11,950. I would probably look to claim quite a bit less than that by simply taking our rent, utilities, and groceries, and assigning 50% to my wife. That would put it at around 7K, which could save us over $300 on our state taxes next year.

[commentator]

Keep in mind, the room and board allowance for living at home is less than the room and board allowance for living off-campus but not at home. The educational institution can provide both allowance numbers upon request.

[endofera]

open a 529 plan, and make contributions and withdrawals (within the same year)

This may not be the case in Colorado, but in Indiana, the 529 account has to be open 12 months before taking a withdrawal or the state tax credit for contributions isn't allowed.

[mithrin]

Mar 19, 2011 21:34:55 GMT -5 endofera said:

open a 529 plan, and make contributions and withdrawals (within the same year)

This may not be the case in Colorado, but in Indiana, the 529 account has to be open 12 months before taking a withdrawal or the state tax credit for contributions isn't allowed.

Thanks for the feedback. I've been trying to find all the details about the CO tax treatment, unfortunately, the state website is nowhere near as easy to navigate as the IRS site.