Tax-advantaged strategies to fund children's college education continue to offer CPA clients some relief from that heavy financial burden, but their value will vary widely according to each taxpayer's financial picture.

The most significant recent change occurred last February when Congress enacted its $787 billion stimulus package, one component of which liberalized, for 2009 and 2010, the former HOPE education tax credit.

The new American Opportunity Tax Credit raised, from $1,500 to $2,500, the annual tax credit available per student, and allows the credit for all four years of a student's undergraduate education, instead of just the first two, according to Mark Luscombe, principal tax analyst for the Tax and Accounting Group of CCH in Riverwoods, Ill., and a tax columnist for Accounting Today.

Technically, the credit can be applied 100 percent to the first $2,000 in qualified expense, and 25 percent against the next $2,000. "They also raised the income limits for phasing out eligibility," Luscombe said, "to between $160,000 and $180,000 for joint filers and between $80,000 and $90,000 for single filers."

In addition, Luscombe noted that 40 percent of the credit is refundable, so that "even if you didn't owe any tax, there is the potential for getting some benefit."

Finally, the scope of eligible educational expenses covered by the American Opportunity Tax Credit was expanded to include "course materials," which, according to the Internal Revenue Service, means "books, supplies and equipment needed for a course of study."

The law is retroactive to Jan. 1, 2009, but would not apply to costs paid in 2008 for an academic semester beginning in 2009.

Income eligibility ceilings may render these tax credits of no use to high-income CPA clients, noted Neil Becourtney, CPA, a partner in the Roseland, N.J., office of J.H. Cohn: "We don't see a lot of our clients being able to take advantage of it."

THE WORKHORSE

What they do take advantage of, Becourtney said, is the workhorse of tax-advantaged college funding - the 529 plan. These arrangements, of course, are state-administered investment or savings vehicles whose investment income is exempt from federal (and typically state) tax when spent on college educational expenses.

"There is no income limit - Bill Gates could set one up," Becourtney explained.

If used for non-sanctioned purposes, investment earnings are both taxed and subject to an additional 10 percent penalty.

Although there are no explicit limits on annual contributions to 529 plans, federal law requires individual states to set limits such that total contributions don't ultimately over-fund a 529 account based on anticipated educational expenses.

Annual federal gift tax exclusion amounts ($13,000 in 2009 per donor; $26,000 for married couples filing jointly) may be a practical constraint for some clients, as the 529 account is established in the child's name. However, federal law allows taxpayers to front-load five years' worth of maximum gifts to a child via a 529 plan, according to Lisa Brinig, CFP, a wealth management consultant in San Diego with the cbiz Wealth Management Group.

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