By Kristi Vaughan
DON’T QUALIFY for financial aid and think
you’ve exhausted all possibilities for reducing
college costs? How about looking to the federal tax code for help? If you have your own
business, there are several strategies available.
Even those who aren’t business owners have a
few options at their disposal.
“We all know how expensive college has
become,” says Costco member Bill Johns, a
certified college and retirement planning specialist with Transitions Advisory in Redmond,
Washington. “But you are not helpless. There
are some little-known strategies that you can
use to reduce costs.”
Financial planners call them “tax scholarships.” They include income shifting, gifting
of assets, limited partnerships and more. And
equally encouraging: You can put many of
these suggestions in place right now, even if
your child is already in college.
Of course, as with any financial strategy,
there should be advance planning and consultation with your financial advisors and tax
experts to see what is most appropriate for
you and your business. “I think most people
don’t realize these savings because they don’t
plan for them,” says Johns.
Hire a kid
One of the best-known small-business tax-advantaged strategies is to hire
your child. In the most simplistic explanation, you hire your son or daughter for a
legitimate job and pay a fair wage for doing
that job. You deduct that wage from your
business earnings, thereby reducing your
taxes. Your child most likely has low enough
earnings to pay little or no tax.
Additionally, your child can open a Roth
IRA where earnings can grow tax-free until
withdrawal. Under current federal tax laws,
retirement money can be withdrawn penalty
free when it is used for higher education. And,
should your child not need the money for
college (your dreams came true and she
receives a merit-based scholarship), then she
has a head start on retirement savings.
One of the best parts of this strategy is the
way it can be started at any time. “At 12 years
old a child can come into the office and sweep
up,” says Gary Carpenter, executive director of
the National Institute of Certified College
strategies can save
on college costs
Planners. “When they are in college, your children can earn substantial amounts of money
and still be in the 10 to 15 percent tax bracket.”
And don’t let the fact that your child goes
to school far away deter you from hiring him.
One of Carpenter’s clients owns a fast-food
business. He e-mails weekly receipts to his
college son, who summarizes them, reconciles
the deposits to the receipts and e-mails back
Form a limited partnership
If you restructure your business as a limited partnership, you can gift a percentage of
ownership (and income) to your child. In
a limited partnership, explains Johns, the
child has no decision-making power
but can use the income generated by
the business to pay for college.
A business owner with at least
one employee can establish an
assistance program, or Section 127
plan. Under this scenario, explains
Carpenter, you create a nondiscriminatory plan that can pay up
to $5,250 per year in qualified educational costs. All employees meeting the
plan’s criteria can get funds, which are
deductible to the business. This suggestion
works best for older children, because
immediate family members are not eligible
for funds until they turn 21.
If you are comfortable relinquishing ownership of land, equipment or stock, you may
want to gift appreciated assets, suggests
Deborah Fox, director of Fox College Funding,
a national company based in San Diego and a
Costco member. These can be held in the student’s name and then sold when needed for
college expenses. Taxes most likely will be less
because of the student’s lower income.
If you are not a business owner but have
The Costco Connection
Financial advisors at Amerprise Financial
Services can assist in planning for college
expenses. Go to costco.com and click on
“Services” and then “Financial planning” or call
toll-free 1-866-549-5952 for more information.