Prescription for Pain-Free Payments for College Focus #1

Tax Scholarships

By Beth Walker

Understanding and using the tax code to your advantage is critical during the college years.  Your ability to shift income from your higher tax bracket into your child’s lower tax bracket creates cash flow that can be redirected from the IRS to the college or university.

This is the single most powerful tool in your arsenal and not one your tax advisor is likely to suggest.

Go easy on your tax advisor… they are literally trained to look at life through the rear-view mirror.  We pay them to tell us what happened in the past year and make sure all the boxes are filled in correctly.  They simply do not spend most of their time in a “what if…” world.  If you have a tax advisor that is an exception to this rule, make sure you thank them frequently and pay them well!

The real benefit of a “tax scholarship” is three-fold:

1. To do this right, you or your business actually pay for services provided by your son or daughter and they begin to set aside money for their education – something 95% of US households don’t ever accomplish.
2. The tax savings you realize each year by moving taxable income from your higher income tax bracket into your child’s lower or non-existent tax bracket can also be deposited for education purposes.
3. By creating a history of taxable income for your child and giving them the ability to pay for 50% of their tuition and fees during college (not room and board, books, transportation, etc.), the student becomes eligible for Education Tax Credits that you aren’t eligible for (you make too much money!).  Four years of college straddles five tax years, so this can total as much as $10,000 in dollar for dollar tax savings for each child in college!

I know what you’re thinking… what can I possibly pay my son or daughter to do that would allow me to legally pay them $100 to $1000 per month when they can’t even seem to keep their room clean or stay on top of their homework?  That is another detailed report all together, but here are some thought-starters for your consideration:

a)     be a model for your brochures, website, or marketing materials

b)     clean and dust your office or home office

c)      pick up trash in your parking lot and wash the windows

d)     create monthly reports for your investment accounts

e)     shred or file papers

f)       help you move your office

g)     do research for you on the internet

h)     take care of rental property

i)       have them own equipment you make lease payments to use

j)       become the runner that shuttles documents or lab results

Think for just a minute about all the things you pay people to do for you.

Depending on your business structure or relationship with your employer, you can have your entity hire your child or hire them as a sole proprietor.  You may even have a working spouse that can hire them in a business unrelated to your medical practice.

The key here is to do it right, document it correctly, and bank the benefits of income shifting and tax credits.

Focus #2 Will Be Posted Soon – Come Back.

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