By Troy Onink
Many families simply earn too much for their child to qualify for need-based college aid, so they need to shift their focus to what I call tax aid; tax savings that help lower the overall cost of college.
With the stock market at all-time highs, parents can combine their investment gains with this tax strategy to wipe out $28,000 in capital gains each year while a child is in college. That’s a pretty good way to save for college, and it can pay dividends in retirement, too.
In the following hypothetical example you will gift your daughter appreciated stock or other investments like mutual funds or ETFs, and your daughter will use the standard deduction, personal exemption and American Opportunity Tax Credit to offset $28,000 of long-term capital gains in a single year.
Typically parents will claim the $4,050 personal exemption for their child because the parents are providing greater than half of the child’s support throughout the year. However, during the college years, if your daughter uses her own income and assets to provide more than half of her own support (roughly half the total cost of college), then she would also be able to claim the personal exemption of $4,050 (for 2016) for herself, instead of you (the parent) claiming it.
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