Tax Refunds as a Pathway to College Savings
Objective:Participants will learn how to use their tax refunds to start/contribute to a 529 college savings plan. Participants will learn how to access free tax preparation services, which will save them money and allow them to contribute even more to college savings plans.
The steps below are part of a draft that will later become part of a larger workshop and distributed with updated information prior to the filing of 2016 taxes.
1)Create a 529 Savings Plan for a child. It can be started with as little as $25. The earnings are tax-deferred and the tax payer pays no federal taxes on qualified educational expense withdrawals. The funds can be used to pay for tuition and educational expenses at any 2-year or 4-year college or vocational school in the US or abroad. Options for specific plans are available at the NY Saves website. Generally, after nominal fees, 529 accounts currently yield 4% appreciation annually.
Once the 529 plan is established, the tax payer will have an account number and routing number. At this point they are ready to deposit a tax refund directly into the account.
2)Identify tax sites in the area that are offering free tax preparation. Links are provided below. A simple search for “VITA Income Tax Sites” should also render results.
Individuals with an income of $62,000 or less per year are eligible for free tax preparation assistance through VITA programs, be it access to tax preparers or free software. VITA program tax preparers are trained to prepare and file both federal and state taxes. Refunds can be direct deposited (even directly into a 529 savings plan) and a check can be mailed.
Below is data regarding GEAR UP population and qualifications for free or reduced lunches at schools, and therefore VITA programming.
Reduced to Free Lunch recipients range from…
Free meals / Income up to 130% of poverty ($30,615 for a family of 4 annually)Reduced Price ($.25) paid by family / Income up to 185% of poverty ($43,568 for a family of 4 annually)
Full price* paid by family / Income over 185% of poverty ($43,568 for a family of 4 annually)
“at least 50 percent of the students are eligible for free or reduced-price lunch under the Richard B. Russell National School Lunch Act” -from the GEAR UP cohort model on www2.ed.gov/programs/gearup
As this indicates, the majority of GEAR UP families and the majority of US households will qualify for free tax preparation. Average savings created by avoiding commercial tax preparers is $250 per return, or $1000 over the 4 year high school period. It is recommended that families devote this savings to the college fund.
3)Continue to contribute throughout the years leading up to college and even start new 529 accounts for future students. While obviously every family is different and will not have identical tax returns, the following information can be used to find a figure to use as an example. The numbers below are strictly the portion of the refund gained through the Earned Income Tax Credit and do not account for other potential credits or refund measures.
Number of Qualifying Children / May Be Eligible for up to:0 / $654 of EIC
1 / $4,367 of EIC
2 / $7,212 of EIC
3 / $8,115 EIC
The average of these EIC credits is $5087. If a taxpayer were to contribute this amount for each of the four high school years, which again, can be directly deposited into a 529 college savings account by the IRS, a cumulative amount after fees and interest would be roughly $22,500 to use for college expenses.
Links
To find free tax preparation site in your neighborhood –
529 Plan Info in NY
If you have questions, comments, or suggestions, please feel free to contact me at r 516-527-8442.