Middle Class Tax Breaks (Kiplinger Magazine)

Slide Show | December 2015

9 Tax Breaks for the Middle Class

istockphoto

If you believe that tax breaks are for millionaires and companies with offshore subsidiaries, you’re probably paying too much to the IRS.

In recent years, lawmakers have enacted dozens of tax incentives targeted at middle-class families. Taking full advantage of these tax breaks is particularly important for dual-income couples because there’s a good chance they’ll get hit by the marriage penalty—when two individuals pay more in taxes as a married couple than they would pay if they were both single. And they work together: Lowering your adjusted gross income (AGI) with one strategy could make you eligible for other tax breaks.

The tax code offers a slew of incentives for starting a family, saving for retirement and educating yourself and your kids.

Take a look at these nine options and make sure you're not missing out.

Breaks for Saving for Retirement

istockphoto

Anyone with earned income (meaning income from work rather than investments) can contribute to a traditional IRA, but not everyone who contributes can claim a tax deduction. That's a no-no for the rich if they're covered by a retirement plan at work.

Here's how the deduction rules operate for traditional IRAs: First, there's a limit on how much you can contribute each year—$5,500 ($6,500 if you'll be at least 50 years old by the end of the year) or 100% of your earned income, whichever is less. If you're not enrolled in a 401(k) or some other workplace retirement plan, you can deduct your IRA deposits no matter how high your income. But if you're enrolled in such a plan, the right to the IRA deduction is phased out as 2015 income rises between $61,000 and $71,000 on a single return or between $98,000 and $118,000 if you're married and file jointly with your spouse. The limits only apply if one spouse participates in an employer plan. If neither does, there are no income limits for taking a deduction.

Spouses with little or no earned income can also make an IRA contribution of up to $5,500 ($6,500 if 50 or older) as long as the other spouse has sufficient earned income to cover both contributions. The contribution is tax-deductible as long as income doesn't exceed $173,000 on a joint return. You can take a partial tax deduction if your combined income is between $183,000 and $193,000.

Breaks for Saving for Retirement

Save and Be Credited

istockphoto

If you are single and have adjusted gross income of $30,500 or less, or you are married and have AGI of $61,000 or less, you can make out even better on a retirement contribution through the Saver's Tax Credit.

The credit is a potential bonanza for part-time workers who fall within the income limits. You can claim a tax credit worth 10% to 50% of the amount you put in, up to a maximum credit of $1,000 ($2,000 for joint filers). Contributions to a workplace plan, such as a 401(k) or 403(b), as well as contributions to a traditional, Roth or SEP IRA, are eligible for this credit.

The lower your income, the higher the percentage you get back via the credit. Some key exceptions: Taxpayers under age 18, full-time students and those claimed as dependents on their parents' returns are not eligible, regardless of their income.

And here's the beauty of a credit compared with a deduction: While deductions reduce the amount of your income that can be taxed, credits reduce the amount of tax you owe—dollar for dollar. You’ll need IRS Form 8880.

Save and Be Credited

Get Paid (More) for Working

istockphoto

The government provides an incentive for people to work: the Earned Income Tax Credit.

For 2015, the maximum EITC ranges from $503 to $6,242, depending on your income and how many children you have. This program, originally conceived in the 1970s, has been expanded several times, and some states (and even municipalities) have created their own versions.

Part of what makes it popular: When the federal EITC exceeds the amount of taxes owed, it results in a tax refund—a check back to you. In essence, you're no longer a taxpayer. But, you have to act to claim the credit by filing—a step many don't take.

The income limits on this program are fairly low. If you have no kids, for example, your earned income and adjusted gross income (AGI) must each be less than $14,820 if you're single and $20,330 if you're married filing jointly. If you have three or more kids and are married, though, your earned income and AGI can be as high as $53,267. The exceptions are considerable—more complicated than we can list here—but the Center for Budget and Policy Priorities has a helpful online calculator to help you determine eligibility.

Get Paid (More) for Working

Your Child, Your Credit

istockphoto

With a new baby also comes a $1,000 child tax credit to lower- and middle-income earners, and this is a gift that keeps on giving every year until your dependent son or daughter turns 17.

You get the full $1,000 credit no matter when during the year the child was born (which is why people make gags about speeding deliveries as the New Year approaches).

Unlike a deduction that reduces the amount of income the government gets to tax, a credit reduces your tax bill dollar for dollar. So the $1,000-per-child credit will reduce your tax bill by $1,000. The credit begins to disappear as income rises above $110,000 on joint returns and above $75,000 on single and head-of-household returns—although there's no limit to how many kids you may claim on a return, as long as they qualify.

And for some lower-income taxpayers, the credit is "refundable," meaning that if it’s worth more than your income tax liability, the IRS will issue you a check for the difference, as with the EITC.

Your Child, Your Credit

Get Credit for That Child’s Care

istockphoto

You may also qualify for a tax credit that will reduce the cost of child care. If your children are younger than 13, you’re eligible for a 20% to 35% credit for up to $3,000 in child-care expenses for one child or $6,000 for two or more. The percentage decreases as income increases. Eligible expenses include the cost of a nanny, preschool, before- or after-school care and summer day camp.

Another way to reduce child-care expenses is to participate in your employer’s flexible spending account for dependent-care expenses. With these accounts, money is deducted from your gross salary before income, Social Security and Medicare taxes. You can contribute up to $5,000 per year.

You can’t claim the child-care credit for expenses covered by a flexible spending account. In general, families that earn more than $43,000 will save more with a flexible spending account, says Laurie Ziegler, an enrolled agent in Saukville, Wis. However, even then, you may be able to use the child-care credit to offset expenses not covered by your flex account. If you paid for the care of two or more children and contributed the maximum, you can use the dependent-care credit to cover up to an additional $1,000 in child-care costs.

Get Credit for That Child’s Care

Zero Tax on Capital Gains

istockphoto

For most people, long-term capital gains (and qualified dividends) are taxed at 15 or 20%—a bargain by historical standards.

That's why some people get so exercised about a rule that allows hedge-fund managers to pay tax at the capital-gains rate rather than at rates for ordinary income, which top out at 39.6%.

But investors in the two lowest income tax brackets pay no tax at all on their capital gains and dividends. That could be a boon to retirees, who have a higher standard deduction than younger taxpayers and who are not taxed on some or all of their Social Security benefits, and the unemployed, who may have had to tap their investments to make ends meet.

To take advantage of the 0% capital-gains rate for 2015, your taxable income can't exceed $37,450 if you are single; $50,200 if you are a single head of household with dependents; or $74,900 if you are married filing jointly. Note that this is taxable income. That's what's left after you subtract personal exemptions—worth $4,000 each in 2015 for you, your spouse and your dependents—and your itemized deductions or standard deduction from your adjusted gross income.

Zero Tax on Capital Gains

American Opportunity Credit

istockphoto

This tax credit, which has been extended through 2017, is available for up to $2,500 of college tuition and related expenses (but not room and board) paid during the year. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). Single taxpayers with MAGI above $90,000 and married couples with MAGI above $180,000 are ineligible for the credit.

The American Opportunity Credit is juicier than the old Hope Credit—it has higher income limits and bigger tax breaks, and it covers all four years of college. And if the credit exceeds your tax liability (whether derived from the regular income tax or the alternative minimum tax), up to 40% of it is refundable. For example, suppose you owe $1,900 in federal taxes and qualify for the full credit. The nonrefundable portion of the credit will reduce your tax bill to $400, and the first $400 of the refundable portion will lower your bill to zero. You’ll receive the remaining $600 as a tax refund.

American Opportunity Credit

Lifetime Learning Credit

istockphoto

If you want to get additional education—for virtually any reason and at virtually any school—you can tap the Lifetime Learning Credit. The credit is calculated as 20% of up to $10,000 of qualified expenses, so you can get back $2,000 per year.

The income limits for the Lifetime Learning Credit are $65,000 if single and $130,000 if married, and you can’t claim both this credit and the American Opportunity Credit for the same student in the same year. Also, no double dipping allowed: Expenses paid with funds from other tax-favored tuition programs, such as a Coverdell ESA, don’t count when figuring either credit.

Lifetime Learning Credit

More Education Breaks for Middles

istockphoto

If neither the American Opportunity Credit nor the Lifetime Learning Credit works for you, there are still other ways the government offers favorable tax treatment for learning—and limits the breaks to the middle class and below.

1) Got a student loan around your neck? You can deduct up to $2,500 of interest paid on the loan each year, so long as your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return). The former student can deduct this even if it's actually Mom and Dad who are paying the bill.

2) Interest on savings bonds is usually subject to federal income tax. However, interest on Series EE and I bonds issued after 1989 can be tax-free when used to pay for qualified education expenses, if you meet certain requirements. This benefit phases out when your 2015 MAGI is between $115,751 and $145,749 for those filing jointly, and between $77,200 and $92,199 for single filers.

Paying for College (Morningstar)

The Short Answer

Ways to Pay for College If Your 529 Isn't Enough

By Karen Wallace | 11-24-15 | 06:00 AM | Email Article

Question: The amount we've saved in our child's 529 account will likely not cover the full cost of college. What are our options? Is there an order to tap other assets that makes the most sense?

Answer: There are many considerations, and the best strategy will, of course, depend on your individual situation. In addition to taking stock of the assets your family already has available to pay the bill in various college-savings accounts (529s, Coverdells, UGMA/UTMA accounts, and so on), you'll also want to assess whether your child might qualify for scholarships, grants, and credits.

Definitely do not skip the step of filling out and submitting a Free Application for Federal Student Aid, or FAFSA; schools use the information reported on the FAFSA to determine how much aid you qualify for. Also, remember to fill it out every year you plan to attend college. Bear in mind that colleges define "aid" more broadly than you or I might. Some of this aid will need to be paid back (such as loans), and some of it will not (such as grants and scholarships).

The amount of financial aid you are eligible to receive is based on your "financial need," which is the difference between the cost of attendance (determined by each school) and the expected family contribution (a measure of the family's financial strength, calculated according to a formula established by law). So, the lower your expected family contribution and/or the higher the cost of attendance at the school, the greater your financial need.

1) Grants and Scholarships
Grants and scholarships are among the most desirable forms of financial aid and should be considered first. Grants and scholarships, also sometimes referred to as "gift aid," are essentially free money--they are financial aid that doesn't have to be repaid. Grants are often need based, while scholarships are usually merit based. Do your research to find out which grants or scholarships you might be eligible for and what their application deadlines are. (One caveat, however: Per theDepartment of Education's website, you might have to pay back part or all of a grant in the event you withdraw from school before finishing an enrollment period such as a semester.)

2) The AOTC 
If you are eligible for the American Opportunity Tax Credit (AOTC), carve out $4,000 in college expenses to be paid with cash or loans ahead of all other sources of money, advises Mark Kantrowitz, a financial-aid expert. You can then use the AOTC to offset those expenses. The AOTC isn't available to everyone: Qualified taxpayers with modified adjusted gross incomes of $80,000 or less (or $160,000 or less for joint filers) qualify for the full credit. Taxpayers earning more than this may qualify for a partial credit, but a taxpayer whose MAGI is greater than $90,000 ($180,000 for joint filers) cannot claim the credit. For more on this, click here.

The reason that AOTC-eligible families should carve out $4,000 of tuition and textbook expenses each year that will be paid for with cash or loans is because the AOTC is worth more than the tax-free 529-plan distribution. The AOTC yields a dollar-for-dollar tax credit based on the first $2,000 of tuition and textbook expenses, then $0.25 on the dollar for the next $2,000). It's also important to remember that you can't use the same qualified higher-education expenses to justify two education tax benefits. For example, you can't use a tax-free distribution from a 529 plan to pay for tuition and textbook expenses that you also want to use to justify the AOTC.

3) Federal Student Loans
As a next step, Kantrowitz recommends figuring out how much of a gap you'll have beyond need-based aid and the 529-plan money, and whether some of it can be covered with Direct Subsidized Loans or Direct Unsubsidized Loans, which have low fixed interest rates and do not require a credit check.

One of the benefits of subsidized loans is that the U.S. Department of Education pays the interest for you if you're in school at least half-time and for a limited grace period after you leave school. This makes subsidized loans a better deal for the borrower than other types of loans, where interest begins to accrue immediately. In addition, subsidized loans have low fixed interest rates--the current rates are 4.29% on a Stafford loan for an undergrad and 5% on a Perkins loan.

Another option is unsubsidized Stafford loans, which are available to all students regardless of financial need. The unsubsidized federal Stafford loan has a fixed interest rate that is among the lowest available interest rates for unsecured debt (currently 4.29% for an undergrad) that is not based on the borrower's credit, Kantrowitz points out. Though the limits are higher than with subsidized Stafford loans, there are also limits to how much you can borrow with unsubsidized Stafford loans.

4) Spend Down Certain Types of Student-Owned Assets Before 529 Assets
In terms of drawing down different types of college-savings accounts, some important considerations have to do with how different assets are "counted" when calculating the expected family contribution. If possible, you should first spend down any assets that have a bigger impact on reducing the aid a student is eligible to receive.

For instance, if you have one, UGMA and UTMA accounts should be spent down before taking a qualified distribution from a 529 plan. The reason is that UGMA/UTMA assets are student owned and reduce financial-aid eligibility by a harsher 20% of the asset value. For this reason, Kantrowitz recommends spending the assets in UGMA/UTMA accounts down to zero before taking a qualified distribution from the 529 plan. Likewise, savings accounts, real estate, mutual funds, or stocks and bonds held in the student's name can also have a bigger impact in terms of reducing the aid a student is eligible to receive.

5) Spend 529-Plan Money to Fill In Any Remaining Gaps
Assets in a 529-plan account can also reduce aid eligibility, but not to the same extent that UGMA/UTMA and other types of student-owned assets can. If the 529-plan account is owned by a dependent student or the dependent student's custodial parent, it is reported as a parent asset on the FAFSA. In a worst-case scenario, this will reduce aid eligibility by up to 5.64% of the asset value, Kantrowitz said.

6) Federal Parent PLUS Loan
Another option is to use a federal Parent PLUS loan to address any remaining gaps that can't be covered by grants and scholarships, student loans, and 529 assets, Kantrowitz says. The PLUS loan has a fixed interest rate for the life of the loan (currently 6.84%), plus a loan fee.

Unlike with student loans, the Parent PLUS loan does depend on the borrower's credit history, but the credit check may not be as stringent as with some private loans. That said, Kantrowitz points out that borrowers with excellent credit may be able to qualify for a lower interest rate on a private loan than on the federal Parent PLUS loan. (Just be aware that if you sign up for a variable-rate loan, rates really have nowhere to go but up from here.)

Kantrowitz also points out that needing to borrow a Federal PLUS loan or a private student or parent loan may be a sign of overborrowing. Although taking on debt to finance college is unavoidable in many cases, there are some important considerations. In terms of students taking on debt, an oft-cited rule of thumb is that their total education debt should be less than their expected starting annual salary--otherwise, they will have trouble paying back that loan debt. Likewise, it's a good idea for parents to be conservative about how much debt they can comfortably take on, particularly as they near retirement and may have reduced incomes and fewer resources available to pay off the loans.

Karen Wallace is a senior editor with Morningstar.com.

What are the Best College Savings Plans (Morningstar)

Morningstar Names Best 529 College-Savings Plans for 2015

Twenty-nine plans are Morningstar Medalists, and two receive Negative ratings.

Leo Acheson, 10/22/2015

Each year, Morningstar evaluates and rates college-savings plans based on five key pillars--Process, People, Parent, Price, and Performance. When rating 529 plans, Morningstar also takes into consideration any unique benefits that plans offer to college savers, including local tax breaks, grants, and scholarships. Morningstar’s "Choosing a 529 Investment," available here and summarized in an article tomorrow, covers some of these main considerations.

In 2015, Morningstar identified 29 plans expected to outperform peers on a risk-adjusted basis over the long haul, assigning those plans Gold, Silver, and Bronze Morningstar Analyst Ratings. Plans that receive Gold and Silver ratings stand out because of generally attractive investment lineups, well-resourced asset-allocation teams, capable oversight, and competitive fees. Bronze-rated plans also offer compelling features, though Morningstar’s analysts don’t have quite as much conviction that these plans will outpace competitors over time.

Meanwhile, 32 plans received Neutral ratings, a reflection of the team’s belief that, although these plans likely won’t deliver standout risk-adjusted returns, they are also unlikely to significantly underperform. Some Neutral-rated programs may hold appeal for in-state residents because of meaningful added benefits, such as local tax breaks, so investors should research their state’s particular benefits.

Just two plans earned Negative ratings in 2015. These plans have flaws that will most likely lead to underperformance over long investment horizons.

This year, Morningstar upgraded five plans and downgraded one, compared with five upgrades and 10 downgrades in 2014. In general, the industry continues to take steps in the right direction, with a number of plans cutting fees or improving the quality of their investment lineups.

Gold MedalistsThe four Gold-rated plans represent some of the best options available to college savers. Investors who favor active management will find much to like with the Maryland College Investment Plan and Alaska’s T. Rowe Price College Savings Plan. Both enlist T. Rowe Price as the program manager and use highly regarded strategies from the firm. The plans also stand out for their asset-allocation glide paths. Unlike some plans that reduce equities in large, abrupt steps at various ages for the beneficiary, these plans’ age-based tracks gradually reduce their stock stakes each quarter to limit the risk of shifting out of equities shortly after a market sell-off.

College savers looking for low-cost, broad diversification should consider Nevada’s Vanguard 529 College Savings Plan, which uses all passively managed strategies. Although many plans have adopted a similar set of inexpensive Vanguard indexes, this plan has lower fees than most thanks to its economies of scale. With nearly $11 billion in assets, it is the second-largest direct-sold plan in the nation. It has passed along cost savings to investors, who can own the age-based portfolios for just 0.19%.

Gold-rated Utah Educational Savings Plan should particularly appeal to investors who want to build customized portfolios. In addition to its premixed offerings, it also allows account holders to design their own age-based tracks using a wide array of investment options. The plan offers primarily Vanguard index funds and mixes in a few strategies from Dimensional Fund Advisors.

Silver MedalistsFour plans carried over their Silver ratings from 2014, including two programs from Virginia. With over $46 billion in assets, advisor-sold CollegeAmerica is more than twice the size of the nation’s second-largest 529 plan. Investors in the program can choose from a compelling set of equity and balanced fund options from American Funds. These investments also underpin the plan’s age-based and static-allocation portfolios, and the plan has some of the lowest-priced investments in the advisor-sold space. Virginia’s direct-sold plan, Virginia529 inVEST, also receives a Silver rating. It uses an assortment of specialty asset classes within its age-based options that aren’t always found in direct-sold 529 plans, such as stable value and global REITs. The age-based track blends active and passive management, favoring index strategies in more-efficient asset classes, and uses strategies from a variety of highly regarded firms.

Ohio’s CollegeAdvantage and Michigan Educational Savings Program also retained their Silver ratings. CollegeAdvantage offers investors a breadth options, including three all-index tracks and one age-based track that mixes active and passive management, while Michigan Education Savings Program uses index strategies from program manager TIAA-CREF. Both offer their investment options at low prices.

Morningstar also upgraded three plans to Silver from Bronze in 2015 thanks to various improvements made by the plans. New York's 529 College Savings Program previously omitted foreign equities from the age-based and static allocation options, though it lacked a solid investment-based reason for doing so. It addressed that shortcoming in July 2015, adding international stocks and bonds to the mix. The plan uses all Vanguard index options and remains one of the industry’s cheapest direct-sold programs.

California’s direct-sold ScholarShare reaffirmed its commitment to open architecture over the last year, which helped it to regain its Silver rating. The plan has long stood out for its use of best-in-class active managers regardless of fund company affiliation. However, in 2014, it quickly removed PIMCO Total Return from the lineup following Bill Gross’ departure and replaced it with Neutral-rated TIAA-CREF Bond Plus strategy, calling into question the state’s dedication to open architecture. It’s good to see that, following additional analysis, California elected to more permanently house this sleeve of bond assets with Gold-rated Metropolitan West Total Return Bond.

Lastly, Illinois’ advisor-sold Bright Directions College Savings Plan cut fees significantly in the process of renegotiating a contract with program manager Union Bank and Trust. In addition to lowering program management fees, the plan eliminated its account setup and maintenance fees.

Bronze MedalistsWhile not as attractive as Gold- and Silver-rated plans, programs that receive Bronze Morningstar Analyst Ratings also hold appeal. In some cases, generous tax benefits can boost a plan’s rating to Bronze, as is the case with Indiana’s direct- and advisor-sold plans. Hoosiers receive a 20% tax credit on contributions of up to $5,000 to the state’s plan, which more than offsets some of the plans’ high fees.

Morningstar bumped one plan’s rating to Bronze from Neutral in 2015: Maine’s NextGen College Investing Plan Direct has reduced fees in each of the past two years, and a few fixed-income funds used within the age-based track managed by BlackRock recently received upgrades of their Morningstar Analyst Ratings. The plan’s expenses now appear attractive, and it offers Maine residents additional benefits in the form of public and private grants.

Neutral RatingsIn 2015, 32 plans received Neutral Morningstar Analyst Ratings, indicating that analysts believe those programs likely won’t outperform or underperform their peers by a significant margin. College savers in these plans should expect returns to land near their peer-group norms over the long haul. Investors living in states with Neutral-rated plans without local tax breaks or other benefits should consider looking nationwide at a Gold- or Silver-rated plan.

In 2015, Morningstar upgraded one plan to Neutral from Negative and downgraded another to Neutral from Bronze. Kansas’ direct-sold Schwab 529 College Savings Plan has improved over the past year, garnering it an upgrade to Neutral from Negative. It had long charged hefty fees to investors, but in 2015 it slashed expenses for its passive and active age-based options by about 45% and 25%, respectively. Such fee cuts mark a meaningful commitment to providing better outcomes for investors. Meanwhile, Nevada’s USAA College Savings Plan’s rating fell to Neutral. The plan has a decent, but not standout, manager lineup, and its fees look middling versus competitors. Moreover, Nevada has no state income tax, so its residents have good reason to shop around.

Avoid These OfferingsMorningstar assigned two plans Negative Morningstar Analyst Ratings in 2015. Both plans also received Negative ratings in 2014. High fees continue to detract from the appeal at South Dakota’s CollegeAccess 529. Although South Dakotans can gain access to the plan for a relatively attractive price, out-of-staters--who make up the majority of the plan’s assets--pay significantly higher expenses. Annual account maintenance fees of $20 create a further hurdle to results.

Arizona’s Ivy Funds InvestEd 529 Plan continues to look unattractive, owing largely to concerns about the plan’s oversight. Program manager Waddell & Reed, parent of Ivy Funds, receives a Negative parent rating stemming from concerns regarding the firm’s thin fixed-income resources and recent manager turnover. The state's oversight also fails to inspire confidence. Arizona defers heavily to Waddell & Reed and, unlike many states, has not hired an investment consultant to help monitor the plan. Arizona is a tax parity state, so residents receive a state tax benefit for investing in any state’s 529 plan--there’s no reason for Arizonans to limit themselves to their home state’s offerings.

Analyst Rating Inputs
Since 2012, ratings for 529 plans use the same scale as the Morningstar Analyst Rating for mutual funds. Both Analyst Rating methodologies consider the same five factors to arrive at the final rating, though the 529 ratings reflect the quality of the entire plan--not a single investment, as is the case for the fund rating. To arrive at an Analyst Rating for 529 plans, analysts consider:

·         Process: Did the plan hire an experienced asset allocator to design a thoughtful, well-diversified glide path for the age-based portfolios? What suite of investment options is offered?

·         People: What is Morningstar’s assessment of the underlying money managers’ talent, tenure, and resources?

·         Parent: Is the program manager a good caretaker of college savers' capital? Is the state managing the plan professionally?

·         Performance: Have the plan’s options earned their keep with solid risk-adjusted returns over relevant time periods? How is the plan expected to perform going forward?

·         Price: Are the investment options a good value?

Money for College - Dos and Don'ts (Morningstar)

Dos and Don'ts of College Savings

Knowing financial aid rules is key given the rising cost of higher education.

Morningstar, 04/27/2012


Investor Question: I'm worried about how we're ever going to afford college for our children. What can we do to increase their odds of getting financial aid in case we can't save enough?

Answer: For many families, the cost of college has become daunting. Tuition, fees, room, and board at a public four-year school currently run $17,131 per year on average (in-state), and $38,589 per year for a private four-year school, according to the College Board. During the past decade, in-state tuition and fees at public universities have increased on average 5.6 percentage points per year beyond the rate of inflation. No wonder, then, that many parents are losing sleep worrying about how they will be able to pay for their children's college education and how much help they can expect from financial aid.

But whether college is just around the corner or years down the road for the student, there are many steps parents can take to improve their odds of making it affordable, including qualifying for financial aid. Below are some ideas to help get them started. Keep in mind that some financial aid is need-based while some is not and that aid includes not just grants and scholarships, but also work-study programs and loans.

Do: Start Saving as Soon as Possible
Some parents worry that saving for college will negatively affect their student's chances for financial aid. But that's misguided, says college planning expert Mark Kantrowitz, publisher of FinAid, an online guide to college funding. "There's this perception that you'd be better off not saving anything," Kantrowitz says, "but the reality is most of the financial aid you're likely to get is going to be in the form of loans, which you're better off not having to pay."

Kantrowitz estimates that every dollar saved for college potentially reduces a student's borrowing costs by two. He suggests parents and students start saving for college as early as possible, noting that he started saving for his children to go to college before they were even born.

Kantrowitz likes 529 accounts as college-savings vehicles in part because of their tax deductibility (in some states), which he likens to "getting a discount on college costs." (You can visit Morningstar.com's 529 Plan Center here.)

Do: Apply for Any Scholarships for Which the Student Might Be Eligible

Applying for scholarships costs nothing but time, and the payoff could make a big difference in reducing out-of-pocket college costs. An obvious place for parents to start is by filling out the Free Application for Federal Student Aid, or FAFSA, the federal government's form for need-based grants, loans (both need-based and non-need-based), and work-study opportunities. Good online resources for scholarship searches include Fastweb and Scholarships.com. Kantrowitz says about one out of eight incoming freshmen at four-year colleges are on some kind of scholarship, with the average amount around $2,800 per student. "The students who win a lot of money are the ones who apply for every scholarship for which they are eligible," he says. One important tip when applying for scholarships: The more optional information provided, the better the odds of matching. For example, if a student or parent has had cancer, including that in the student's profile helps improve his or her chances of matching one of the many scholarships related to the disease.

Do: Have Kids Close Together in Age

Financial aid formulas are weighted heavily on parental income, and having multiple kids in college at the same time actually improves financial aid eligibility because it reduces the amount parents are expected to pay for each. This helps ease the burden on families having to pay two or more tuitions simultaneously. "Someone who has twins is going to get more aid than someone who has single children separated by four years," Kantrowitz says. Of course, it may be a little late to put this plan into action for most parents, but it also works if, say, a parent attends college at the same time as their child or children. Having an older child delay college to attend at the same time as a younger sibling also works.

Don't: Put Assets in the Student's Name

In financial aid calculations, assets belonging to parents have less of a negative impact than those belonging to students. So money in a 529 plan, which is considered the parents' property, counts less against financial aid than, say, money held in a custodial account such as a UGMA/UTMA, which is legally considered the student's property. One way around this problem is to spend down the student's assets before applying for aid. UGMA/UTMA funds can be used for a wide variety of qualifying expenses, so long as they are for the minor's benefit. Incidentally, money in a 529 opened by a grandparent on behalf of a student does not count against financial aid.

Don't: Count on the Student Getting a Full-Ride Scholarship

Expecting a child's academic or athletic brilliance to bail the parents out from having to pay for college? Think again. Fewer than 0.3% of students win full-ride scholarships or need-based full-ride grants, says Kantrowitz, whereas about two thirds of all undergraduates receive some kind of financial aid, including student loans.

Don't: Sell Assets the Year Before Applying for Aid

A common mistake parents make, Kantrowitz says, is to sell a large chunk of taxable investments to help pay for college the year before applying for aid. This might trigger capital gains that add to parental income and thus reduce financial aid eligibility. (Converting traditional IRA assets to a Roth can also add to taxable income, thereby hurting financial aid eligibility.) Keep in mind that students usually must reapply for financial aid each year, so holding off and waiting a year to sell might not help. It's best to plan ahead if possible by putting funds for college in a 529, where their impact on financial aid is reduced.


Other Financing Methods, With Caveats

Some parents opt to use their retirement accounts to help fund college costs. This has its advantages and disadvantages. The biggest advantage to this approach is that the 10% penalty for early withdrawals is waived if the money is used for qualified college expenses. Also, Roth IRA contributions might be withdrawn tax-free, though any earnings on those contributions are subject to regular income tax rates. All withdrawals from traditional IRAs are subject to regular income tax rates. The problem with this approach is that all IRA withdrawals, whether taxed or not, count as total parental income in financial aid calculations. So even though parents might save on taxes or penalties by doing this, they might also make it more difficult for the student to obtain need-based financial aid.

Borrowing from work-based retirement accounts, such as a 401(k) or 403(b) plan, is another option and does not affect need-based financial aid. However, the loan must be repaid within five years, and possibly immediately in the case of job loss. Parents might be eligible for hardship withdrawals, but those are subject to income taxes and penalties.

6 Reasons to file a tax return (even if you don't have to)

Do I Need to File a Tax Return This Year? (from irs.gov)


You are required to file a federal income tax return if your income is above a certain level, which varies depending on your filing status, age and the type of income you receive. However, the Internal Revenue Service reminds taxpayers that some people should file even if they aren't required to because they may get a refund if they had taxes withheld or they may qualify for refundable credits.

To find out if you need to file, check the Individuals section of the IRS website at www.irs.gov or consult the instructions for Form 1040, 1040A or 1040EZ for specific details that may help you determine if you need to file a tax return with the IRS this year. You can also use the Interactive Tax Assistant available on the IRS website. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions.

Even if you don’t have to file for 2011, here are six reasons why you may want to:

1. Federal Income Tax Withheld You should file to get money back if your employer withheld federal income tax from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.

2. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund. To get the credit you must file a return and claim it.

3. Additional Child Tax Credit This refundable credit may be available if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

4. American Opportunity Credit Students in their first four years of postsecondary education may qualify for as much as $2,500 through this credit. Forty percent of the credit is refundable so even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student.

5. Adoption Credit You may be able to claim a refundable tax credit for qualified expenses you paid to adopt an eligible child.

6. Health Coverage Tax Credit Certain individuals who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a 2011 Health Coverage Tax Credit.
Eligible individuals can claim a significant portion of their payments made for qualified health insurance premiums.

For more information about filing requirements and your eligibility to receive tax credits, visit www.irs.gov.