How to pay for college with tax-deductible dollars

By Dan Wicker


The cost of higher education is increasing at an average of 3.1% for tuition and fees and 3.1% for room and board per year according to The College Board. For private colleges, this increase could be even higher at 3.6% for tuition and fees.

There is mixed advice on what type of account (529 college savings plans, Roth IRAs, etc.) should be used for saving for college; however, with the new tax law there are changes that now offer the opportunity to pay for college with tax-deductible dollars.

To take advantage of it, CWA Partner Toni Lee advises her clients to reevaluate the way they are paying for their students’ higher education costs by looking at the child’s earned income, rather than their own.

“Employment of your children within your business,” Toni says, “can provide tax savings opportunities for the entire family unit.”


Child’s Earned Income: Your child’s earned income (wages & salaries) is taxed at their reduced rate. This means that their earnings up to $12,000 annually will be tax-free since they are offset by the standard deduction of $12,000 under the new tax law. Income in excess of this amount is taxed at 10% up to $9,525 and 12% up to $38,700.

Kiddie Tax: The Kiddie Tax applies to a child’s unearned income (i.e. interest, dividends, capital gains, etc.) received under the age of 19, or 23 for full-time college students. Under the new tax law, this type of income is now taxed at the rate paid by trusts and estates, rather than at the parent’s tax rate used in previous years.

The above Kiddie Tax rules do not apply if the child provides over half of his own support from earned income (salaries and wages). Meaning, if the child’s earned income is at least half of his college cost, both earned and unearned income is taxed at the child’s low rate.

Capital Gains & Dividends: If a doctor were to sell any appreciated stocks, the gain would be taxed at the doctor’s tax rate and include an additional federal capital gains tax should they already be in the highest tax bracket.

Should the doctor gift the appreciated stock to the college-aged student, once sold the gains would then be taxed at the student’s low rate. There are limitations on the amount that can be gifted per child, as well as other rules regarding married doctors. It’s best to consult a CPA to guide you through this process.

American Opportunity Tax Credit (AOTC): Now that the child is paying for their college costs with their own income, they are now eligible to claim educational tax credits. The American Opportunity Tax Credit is a credit for qualified education expenses paid for the first four years of college, with a maximum annual credit of $2,500 per student.

Most doctors are not able to claim this credit as they are phased out as income reaches $80,000 for singles, and $160,000 for married couples.

In conclusion, Toni reminds us that it’s important to stay abreast of this topic, “Stay tuned for future changes. The Trump administration is proposing ‘Tax Cut 2.0’ which includes additional changes and opportunities for educational planning.”

With a strategic tax plan, the opportunity for savings is there. As you are preparing to write a large check this semester, reconsider your approach and let your CPA craft a plan to help your money work for both you and your child. If you need help to get started, contact CWA for a complimentary consultation.

Cain Watters & Associates LLC is an investment advisor registered with the Securities & Exchange Commission. Information provided does not take into account individual financial circumstances and should not be considered investment advice to the reader. Request form ADV Part 2A for a complete description of CWA’s financial planning and investment advisory services. There is no assurance that other client actual results will be similar to information presented. Estimated future results may not be obtained due to economic, business and personal circumstances. CWA and Tectonic are affiliated firms.


Dan is managing partner at Cain Watters & Associates (CWA), a Dallas-area CPA/RIA firm.   Dan has designed financial plans for hundreds of dental professionals helping them take full advantage of their earning power.


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