Would having an extra $100, $250, $500 or $2,000 more per month make a difference
in the choice of private K-12 or college you make for your children or grandchildren?
Would reducing your taxes by 10 percent, 25 percent, even 50 percent or more make
a difference in your and your childrens lives before, during and after the
college years? If so, you just might be in the right profession at the right time.
Owning and operating a home-based business is one of the most underutilized strategies there is for helping families save for their childrens education, and creating financial freedom in the college years and beyond.
The Startling Cost of College
The cost of college has increased at double the rate of inflation for the fifteenth straight year in a row. The yearly live-away college experience now averages $16,200 for a state college, $25,000 for a state university, $40,000 for a mid-level private university and over $50,000 for an Ivy League or top-tier private college.
Nearly 70 percent of state college students are taking five years or more to graduate. That means a four-year degree program can cost a family from $80,000 to more than $200,000 per student.
If you pay for college from monthly cash flow, you will be spending from $1,500 to $5,000 or more per month. Thats why most parents are forced to take massive loans. But thats not a good solution. A $65,000 state university parent loan becomes a ten-year monthly payment of $820; a $200,000 elite Ivy League education translates into a $2,500 monthly payment.
Happily, many of the tax techniques you may already use in running your home-based business can help. But there are additional, little-used but powerful strategies that most college-bound business owners and their advisors dont know about, or wrongly assume dont apply to them because of the size of their business or income.
The College Power Equation
I like to use the equation, 1040 + 970 + 125 + 127 + 401(k) = College Dollars to help explain the power of small business for college. This equation summarizes the different ways in which you can legally put tax dollars back into your pocket to pay for college. Here is a brief overview of what this equation means:
1040: The core document for calculating your taxes in the United States
is the federal form 1040. Owning a small business provides hundreds of tax benefits
not available to the typical W-2 wage earner. Generally speaking, college-based
tax strategies legally redirect taxable income and taxes from a higher-tax-bracket
individual (such as the parent or grandparent) to a lower-tax-bracket individual
(such as a student).
College planners categorize these benefits as using tax capacity. A typical example of using tax capacity is hiring your child to work in your business. If a parent or grandparent is in a combined 40-percent state and federal tax bracket and the student is in the 10-percent (or potentially 0-percent bracket), you may be able to save 30 percent in tax dollars. If you had paid the student $4,500 in earnings, you saved $1,350 in taxes, which can be redirected towards college.
970: IRS Bulletin 970 summarizes the various college-specific tax deductions and tax credits available to college families. Hope and Lifetime Learning Credits are two of the most commonly used strategies. When combined with tax capacity, these credits become available to virtually all college familieseven ones that have been phased out because of income. Qualifying to legally use the Hope credit can save up to $1,650 in taxes; the Lifetime Learning Credit saves up $2,000 in taxes.
125: Section 125 explains how to use a Flexible Savings Account (FSA) that lets employees set aside pre-tax dollars for their choice of paying for fringe benefits. If qualified, you can pay for health insurance, disability insurance, dependent care or medical expense reimbursements with pre-tax dollars. An employee can contribute up to $5,000, so moving the FSA contribution from the 40-percent tax bracket to the student-employee would save 30 percent, or $1,500.
127: Section 127 describes an Educational Assistance Plan (EAP) that lets you reimburse employees for undergraduate and graduate college expenses, whether or not they are related to the employees job. When EAP requirements are met, the employer can provide and the student-employee can receive $5,250 per year, tax-free, to both parties. Again, using our example of a 40-percent tax bracket employer and a 10-percent tax bracket student, they can save 30 percent, or $1,575 per year in taxes.
401(k): This is a reference to the wide range of tax-deferred Qualified Retirement Plans available to small business owners. For example, Simplified Employee Pensions (SEP) and Profit Sharing Plans (PSP) allow individuals to set aside up to $45,000 per year. Traditional 401(k) Plans allow deferral of up to $15,500 per year ($20,500 if over fifty years old). Selecting the right qualified plan for your situation is beyond the scope of this article. But assume you set aside the maximum of $45,000 in a SEP and are in the 40-percent tax bracket, you have deferred $18,000 in taxes.
The Power of Combination
Using just the first four strategies in this article can save you $500 per month, which covers a $40,000 loan, without changing your current lifestyle. Add in creating a retirement plan and you would now have $6,075 + $18,000 = $24,075, or the annual price tag of a state universityboth of which did not change your current cash flow!
Combine tax capacity savings with increasing your income by operating a successful network marketing business, and college can become the joyous time it was meant to be for your student and you.
LINDA P. TAYLOR is a Certified College Planning Specialist
Registered Financial Consultant in small business planning for
the college years. She is CEO of the College Funding Network and
shows families how they to pay for college without sacrificing student
choice or parent retirement. To get a free copy of Lindas
eBook Insider Secrets to Tax Breaks for College visit