@middleclassparent We were in the same situation few years back. Our kid’s university allowed to divide yearly tuition, room & board in ten equal installments. We both are on w2 as well and we polled money from two paychecks and paid monthly installment while maxing out our 401k contributions. It was tough but we did it. Again it all depends on individual family’s situation. We were lucky that there was no employment interruption and no major medical or any other expenses.
other income - we have a rental condo. Would there be any advantage of making my son the receiver of the rental?
Yes, as far as 529 move, liquidation is not an issue for me since the net would be even considering losses last year.
@fzehigh - Thanks for the tip. Yes, definitely that’s the route we want to take the installment route. Hopefully, whatever university he chooses offers that.
If your son is the owner on paper of the condo, and receives the income of the condo, then that condo becomes his asset for financial aid purposes. The formulae are less forgiving for student assets than they are for parent assets.
Run the Net Price Calculators at the websites of the colleges and universities that your son is considering. Re-run with as many different distributions of income and assets as you feel like. Compare all of the results.
Then ask yourself these questions:
What is the maximum each year that you are truly ready, willing, and able to pay?
Under what conditions are you ready, willing, and able to pay that amount of money? Only for four years? Only if the four years includes a semester or year of study abroad? (yes, I know people who have imposed that condition) Four years plus one extra summer and/or semester? Until the degree is completed even if it runs to 5, 6, 7, or more years? Only for a certain major? Only for a GPA of X.X and above?
When you know your own true bottom line, you will know if 70k is something you can commit to.
One possibility is to pay off your primary home mortgage with other assets (depending on how the college treats primary home equity - some ignore more of it than others). That will save up to 5% of the amount each year if you are close to the full pay threshold. So for example you could liquidate savings, or even sell the condo (or take out a bigger mortgage on the condo, though I wouldn’t recommend it) and pay down your primary mortgage. But you need to make sure it will actually benefit you before doing anything like that.
Because need based aid is based on prior, prior year income but current assets, changing your asset configuration would help more in the near term (i.e. sophomore year) than changing your 2019 income (which would only affect junior and senior year).
The best ways NOT to pay $70,000 a year for college…
- Do NOT allow your kid to apply to colleges that will cost you $70,000 a year. There are instate public universities that likely cost 1/2 that amount or so....in your state. Start there.
- Get a copy of the book...Paying for College Without Going Broke.
- Have your kid apply to colleges with guaranteed merit aid for his stats.
Things you have mentioned…and my comments.
- You don’t just have W2 income if you also own a rental property. You have an additional asset...the equity in that rental property...and additional income in rents.
- Putting the rental in your son’s name is short sighted and likely won’t have the desired outcome. Student assets are assessed MUCH higher than parent assets. So your son would now have the equity in this rental as HIS asset...and Rhett rents would be HIS income.
- Don’t make up “income” that you have earned and attribute it to your son. That is dishonest.
- To paraphrase another poster here...do not do anything for financial aid benefit unless you were planning to do it anyway.
- What IS your annual gross income? With all these financial gymnastics...you might find you aren’t eligible for a dime more need based aid...
My suggestions…
- Start opening your mind to affordable colleges for your kid.
- If you really want to be low income and qualify for more need based aid...sell that rental property and donate the profits to charity. Quit your job, and file for food stamps. My point is...I think you need to count your blessings...and figure out what you CAN afford.
- Start researching guaranteed merit awards.
- Remember...no one...repeat...no one needs to go to a $70,000 a year college.
And lastly…because you own real estate in addition to your primary residence…the net price calculators will not likely be accurate.
@thumper1 - Appreciate your input. Like i said, ready to pay 70k, but how can we get something back and that’s what i am asking for.
in a perfect society, we should be getting a tax deduction from fed. But the system is setup to punish those people that are saving more and earning more to pay their dues.
Wouldn’t this family get a little tax credit? What is the income ceiling on the college tax credits.
Do you really want your 18 year old kid to assume ownership of an investment property? I wouldn’t- even if it were advantageous from a financial aid perspective which I don’t believe it would be.
Do NOT make decisions for the purposes of increasing your aid which are poor financial planning decisions based on your entire picture/profile. I know people who have bought annuities to increase their aid- great. Now you’ve taken cash, or another asset, and locked yourself into a high fee investment. So you may get another 5k in aid- but are losing 50K in appreciation for the life of the investment vehicle? Dumb. AND paying out high fees (which could have been building up in a different type of investment for YOUR benefit). I know people who have been churning properties back and forth among family members to get them off the balance sheet of whoever needs to pay college tuition into the hands of someone else. Sounds smart- until Grandma needs to go into a nursing home, and the condo YOU “gave” her, is part of the look-back period. Bye bye condo. Or brother-in-law has an unpaid tax situation and liquidates YOUR condo (it’s his legally, but was supposed to revert back to you once your kid graduated from college) in order to fulfill his obligation.
I don’t know you. But if you are lucky enough to have two stable incomes and not a lot of debt, you are well ahead of most people who have kids heading off to college. Find a college which your kid can get into, and which you can afford. That’s step one. Everything after that is gravy.
Liquidate your savings to pay down your primary mortgage? What happens if you really need cash? Healthy people get into accidents. Stable companies get acquired-- and 90 days later, your pink slip comes.
I’d think long and hard about how many years you have until retirement before making any big moves.
Not sure why you’d think you were owed a tax deduction for this. (And I was full pay at a $70K school for a couple of years as a single parent). It was my choice to allow my kid to apply to that type of school and spend my money that way.
I believe the income max for the tax credit is 180k so pretty much useless for those that earn enough to be able to pay the 70k. That’s the thing about many tax credits your hear the politicians promote and get everyone all excited about, they actually don’t pertain to a lot of those seeking the deductions.
You will qualify for the AOTC if your income is below $180k (married, filing jointly). The top amount it $2500 credit, but that’s phased out between $160-180k. Unlikely you’d qualify for the LLC since the max income is lower.
The 529 plan contributions can help on state taxes, and in some states it helps a lot.
Your son needs to apply to all the scholarships he can. Often there are dept scholarships available after freshman year.
I don’t know if there is a look back period so speak to an accountant but I believe annuity assets are protected against the NFC contribution. If so, you could move regular brokerage assets (or savings) to a deferred annuity and you would have less in “savings” for them to assign to your contribution. Of course you would have to deal with the liquidity issues of the annuity, but if you’re not using the money for 5 - 10 yrs that might work.
So I guess what OP is asking is if he can transfer assets (and the associated income) to his kid, not in order to get need-based aid from the college, but so the kid will have sufficient income to claim the AOTC.
You could give your kid the condo (permanently), then it would be his income. But do you want to do that (do you plan to gift it to him anyway or is it something you are counting on for your own retirement)? Is it even feasible (for example if there’s a mortgage on it in your name)?
@middleclassparent: “in a perfect society, we should be getting a tax deduction from fed.” No, you’re asking for a federal tax break for a private transaction in which you buy something you can afford from a local private company called a college. You shouldn’t get a federal tax break for buying an expensive sports car for your child from your local dealership. There’s no basis for your protestation of entitlement.
“But the system is setup to punish those people that are saving more and earning more to pay their dues.” Step back a sec. Savings gives you options other people can only dream about. The system is set up to enable people who have resources to use those resources to purchase educational opportunities for their children. You have money, you have options. If you have no money, you have demonstrated need. People with demonstrated need have options thanks to need-based funding but that often does not cover basic life needs and those students are one $1000 car repair bill away from having to drop out. Those people who are living on the financial knife edge - they are the ones who understand punishment.
Now regarding your actual options - if you are not considering applying to a school that is financially amenable to you, the 529 route is one option. However, you are at least a decade late to that game. The max you can contribute annually to a 529 is limited by federal gift limits, and the money will only grow significantly over the next 4 years if you place it in higher risk funds, which would place the whole fund at risk - which is something no fidicuary would advise when the child is already college age.
@shuffle1 federal “gift limits”?
@belknappoint…what is the max one can contribute to a 529 plan per year?
@thumper1 $15,000 per year per donee is the federal annual exclusion amount for 2019. (I think some states also have gift taxes of their own.) Lots of wealthy folks take advantage of the “5-year front-loading” exception, which allows you to transfer up to 5 years of annual exclusion gifts ($75,000) to a 529 account for the donee in year 1. If a married couple does this, that would be $150,000. (Note that you can’t make any additional gifts to the donee within that 5-year period.) Even if the 529 has fairly low annual returns (5%?), you are probably looking at $300,000 or more by the time the kid is ready to start school.
I’m not a fan of retitling “shenanigans,” in part because there are gift tax implications.
There is an annual amount after which the giver needs to file a form. But the amount you can gift a person is really over your lifetime and it’s quite large.
There is no absolute restriction in U.S. law as to how much money one person can gift to any other person. The gift tax laws kick in if a certain amount is exceeded each year or over the gift giver’s lifetime exemption amount. This will dictate whether or not the gift giver must complete a gift tax return and possibly pay gift tax.
The most that can be contributed to a 529 account in any one year is the amount that will bring the account balance to the maximum allowed by the particular 529 plan rules. Each plan sets its own limits, which in my experience typically are in the $500k range. So, you could open a new 529 account today and immediately deposit $500k, or whatever the plan’s maximum account balance limit is. Of course, any amount that exceeds the federal annual gift tax exclusion amount must be reported on IRS Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return). State tax implications are outside the scope of this post.