<p>Is this a good idea or do you see any potential problems with this plan?</p>
<p>We have two students going to college in 2013. In order to best use the American Opportunity Tax Credit, we plan on changing our tax withholding on January 1st of this year to equal the amount of anticpated tax credits. The money will be put in a seperate account monthly to only be used for qualifying college expenses. </p>
<p>If one child doesn’t end up attending college (which is possible) we would then still have the money available to pay in.</p>
<p>One forseeable risk would be if for some reason they do not extend this tax credit into 2013 and they also do not provide any other type of college tax credit to replace it.</p>
<p>A far better strategy is to not worry so much about allocating money, but in balancing your withholding to meet your needs. If you are likely to end up with a refund, then reduce your withholding. If you’re likely to end up owing, or at break even, don’t.</p>
<p>Look at what you’re taxes are likely to be like in for tax year 2012. You may have claimed child tax credit for your two students, if they were under 17, but won’t once they turn 17. That’s as much as $1000 per child, unless you’re phased oud due to income on either end. If they are graduating HS in 2013, they will qualify as FT students, even if they don’t start college, so they are both likely to still be dependents.</p>
<p>Since you don’t know what kids of aid they will get yet, or where they will attend, you don’t know if they will have qualified expenses.</p>
<p>We already estimate our taxes and make sure not to pay any extra in. I am sure that the $4,000 would be met by one child because our EFC is $11,000 for each child and he won’t be receiving any merit aid. I think you are right about it being a variable just how high the deductable expenses would be, because I am only estimating about $2,000 a year in books, fees, supplies, etc? </p>
<p>It just seems it would be better use of the tax credit to pay for college expenses if it were used proactively vs. looking for the money back after already paying it out of pocket?</p>
<p>Most parents aren’t good at predicting their tax situation a year or more ahead. That is why so few manage to do what you are considering. However, this plan may work for you.</p>
<p>I reduce my withholding in anticipation of tax credits and consider it good tax planning.</p>
<p>You should know by mid-2013 where they are going, and what they will be paying (other than books). I would not adjust withholding until then - and at that point adjust it to pay yourself the credit over the remaining months of the year. Hopefully, we will also know by then if the tax credit is extended. I would only adjust based on the less-generous Hope Credit until we know it has in fact been extended beyond 2012.</p>