What Should Single Parents Know About College Planning?Submitted by MidWestOne Investment Services on April 27th, 2021
Single parents are faced with the pressure of supporting an entire household on their own—which can often make paying for college seem like an insurmountable goal. Fortunately, there are several different ways for single parents to save, invest, and pay for their child's college education.
Learn more about some of the programs available, including some that are unique to single-parent households.
Focus on Your Tax Advantages
Several provisions of the U.S. tax code are designed to help single parents get ahead. By setting aside any refunds these tax credits generate, single parents can amass a bit of a nest egg to help launch a college-aged child. These tax breaks include:
· The Child Tax Credit, which provides parents with a tax credit of $2,000 per child (under age 17) per year. This credit doesn't phase out until a single parent hits $200,000 in annual income, and those earning between $200,000 and $240,000 will still be eligible for some amount of the credit.1
· The Child and Dependent Care Tax Credit provides taxpayers with another $3,000 per child, or up to $6,000 for two or more children.1
· The Earned Income Tax Credit can provide up to $6,728 for those earning an adjusted gross income (AGI) of $51,464 in 2021.2
Take Advantage of Tax-Preferred Savings Vehicles
If your state offers a tax refund or credit for contributions to a 529 college savings account, taking advantage of this can reduce your taxes and allow you to set aside some funds for your child. Unlike other savings vehicles, 529s are designed for higher education expenses only—if you withdraw funds to use for non-college expenses, you may be required to pay a penalty.3
There's no limit to the amount a parent can contribute to a 529 plan, although all states have caps on how much will count toward a deduction or credit.2 And not all states have a state income tax or provide any credit or deductions for 529 contributions, so single parents should investigate their state's rules before deciding whether this option makes sense.
Be Strategic in Filling Out the FAFSA
The FAFSA, or Free Application for Federal Student Aid, can often be the key to financing college. The FAFSA relies on a parent's income, family size, assets, and tax information to generate an "expected family contribution," or EFC. The lower the EFC, the more aid a student may qualify for, including Pell Grants, scholarships, and work-study programs.4
As a result, it's a good idea for single parents to do everything they can to lower their taxable income during the year or two before a child goes to college. This can include increasing 401(k) or traditional IRA contributions (since a parent's retirement assets aren't reported on the FAFSA), pushing off irregular sources of income into the next calendar year, or taking advantage of itemizing your deductions 3
College can be a stressful time for both you and your teenager. But by having a plan in place to help defray college costs, single parents can reduce the financial pressure associated with launching their teen.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. 1 https://www.fool.com/taxes/tax-credits-guide-2021 2 https://www.savingforcollege.com/article/how-much-is-your-state-s-529-pl... 3 https://www.savingforcollege.com/financial_aid_basics/financial_aid_and_...
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