As higher education costs continue to rise, you may be concerned about how to save and pay for college. Fortunately, several tools and strategies offered in the U.S. tax code may help ease the financial burden. Below is an overview of some of the most beneficial tax breaks and planning options for funding your child’s or grandchild’s education.
A 529 plan allows you to buy tuition credits or contribute to an account set up to meet your child’s future higher education expenses. State governments or private institutions establish 529 plans.
Contributions aren’t deductible. They’re treated as taxable gifts to the child, but they’re eligible for the annual gift tax exclusion ($19,000 in 2025). If you contribute more than the annual exclusion limit for the year, you can elect to treat the gift as if it is spread out over five years. By taking advantage of the five-year gift tax election, a grandparent (or anyone else) can contribute up to $95,000 ($19,000 × 5) per beneficiary this year, free of gift tax.
Earnings on 529 plan contributions accumulate tax-free until the education costs are paid with the funds. Distributions are tax-free to the extent they’re used to pay “qualified higher education expenses,” which can include up to $10,000 in tuition per beneficiary for an elementary or secondary school. Distributions of earnings that aren’t used for qualified higher education expenses are generally subject to income tax plus a 10% penalty.
You can establish a Coverdell ESA and make contributions of up to $2,000 for each child under age 18. This age limitation doesn’t apply to beneficiaries with special needs.
The right to make contributions begins to phase out once AGI is over $190,000 for married couples filing jointly ($95,000 for singles). If income is too high, the child can contribute to his or her own account. These thresholds haven’t been adjusted for inflation in many years.
Although Coverdell ESA contributions aren’t deductible, income in the account isn’t taxed, and distributions are tax-free if spent on qualified education expenses. If the child doesn’t attend college, you must withdraw the money when the child turns 30, and any earnings will be subject to tax plus a penalty. However, you can transfer unused funds tax-free to a Coverdell ESA of another family member who isn’t 30 yet. The age 30 requirement doesn’t apply to individuals with special needs.
Series EE U.S. savings bonds offer two tax-saving opportunities when used for college expenses:
To qualify for the college tax exemption, you must purchase the bonds in your name (not the child’s) or jointly with your spouse. The proceeds must be used for tuition, fees, etc. — not room and board. If only some proceeds are used for qualified expenses, only that part of the interest is exempt. The exemption is phased out if your modified adjusted gross income exceeds certain amounts.
Beyond saving vehicles, there are also tax credits you may be able to claim while paying college expenses:
You can’t claim the AOTC and the LLC for the same student in the same year. However, you can claim each credit for different students in the same household if you meet eligibility requirements.
These are just some of the tax-wise ways to save and pay for college. Contact us to discuss the best path forward in your situation.
© 2025
When selling business assets, understanding the tax implications is crucial. One area to focus on is Section 1231 of the Internal Revenue Code, which governs the treatment of gains and losses from the sale or exchange of certain business property.
The federal income tax character of gains and losses from selling business assets can fall into three categories:
Gains and losses from selling Sec. 1231 assets receive favorable federal income tax treatment.
Net Sec. 1231 gains. If a taxpayer’s Sec. 1231 gains for the year exceed the Sec. 1231 losses for that year, all the gains and losses are treated as long-term capital gains and losses — assuming the nonrecaptured Sec. 1231 loss rule explained later doesn’t apply.
An individual taxpayer’s net Sec. 1231 gain — including gains passed through from a partnership, LLC, or S corporation — qualifies for the lower long-term capital gain tax rates.
Net Sec. 1231 losses. If a taxpayer’s Sec. 1231 losses for the year exceed the Sec. 1231 gains for that year, all the gains and losses are treated as ordinary gains and losses. That means the net Sec. 1231 loss for the year is fully deductible as an ordinary loss, which is the optimal tax outcome.
Now for a warning: Taxpayers must watch out for the nonrecaptured Sec. 1231 loss rule. This provision is intended to prevent taxpayers from manipulating the timing of Sec. 1231 gains and losses in order to receive favorable ordinary loss treatment for a net Sec. 1231 loss, followed by receiving favorable long-term capital gain treatment for a net Sec. 1231 gain recognized in a later year.
The nonrecaptured Sec. 1231 loss for the current tax year equals the total net Sec. 1231 losses that were deducted in the preceding five tax years, reduced by any amounts that have already been recaptured. A nonrecaptured Sec. 1231 loss is recaptured by treating an equal amount of current-year net Sec. 1231 gain as higher-taxed ordinary gain rather than lower-taxed long-term capital gain.
For losses passed through to an individual taxpayer from a partnership, LLC, or S corporation, the nonrecaptured Sec. 1231 loss rule is enforced at the owner level rather than at the entity level.
Because the unfavorable nonrecaptured Sec. 1231 loss rule cannot affect years before the year when a net Sec. 1231 gain is recognized, the tax-smart strategy is to try to recognize net Sec. 1231 gains in years before the years when net Sec. 1231 losses are recognized.
Achieving the best tax treatment for Sec. 1231 gains and losses can be a challenge. We can help you plan the timing of gains and losses for optimal tax results.
© 2025
Saving for retirement is a crucial financial goal and a 401(k) plan is one of the most effective tools for achieving it. If your employer offers a 401(k) or Roth 401(k), contributing as much as possible to the plan in 2025 is a smart way to build a considerable nest egg.
If you’re not already contributing the maximum allowed, consider increasing your contribution in 2025. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions can have a significant impact on the amount of money you’ll have in retirement.
With a 401(k), an employee elects to have a certain amount of pay deferred and contributed to the plan by an employer on his or her behalf. The amounts are indexed for inflation each year and they’re increasing a modest amount. The contribution limit in 2025 is $23,500 (up from $23,000 in 2024). Employees age 50 or older by year end are also generally permitted to make additional “catch-up” contributions of $7,500 in 2025 (unchanged from 2024). This means those 50 or older can generally save up to $31,000 in 2025 (up from $30,500 in 2024).
However, under a law change that becomes effective in 2025, 401(k) plan participants of certain ages can save more. The catch-up contribution amount for those who are age 60, 61, 62 or 63 in 2025 is $11,250.
Note: The contribution amounts for 401(k)s also apply to 403(b)s and 457 plans.
A traditional 401(k) offers many benefits, including:
If you already have a 401(k) plan, look at your contributions. In 2025, try to increase your contribution rate to get as close to the $23,500 limit (with any extra eligible catch-up amount) as you can afford. Of course, the taxes on your paycheck will be reduced because the contributions are pretax.
Your employer may also offer a Roth option in its 401(k) plans. If so, you can designate some or all of your contributions as Roth contributions. While such amounts don’t reduce your current MAGI, qualified distributions will be tax-free.
Roth 401(k) contributions may be especially beneficial for higher-income earners because they can’t contribute to a Roth IRA. That’s because the ability to make a Roth IRA contribution is reduced or eliminated if adjusted gross income (AGI) exceeds specific amounts.
Contact us if you have questions about how much to contribute or the best mix between traditional and Roth 401(k) contributions. We can also discuss other tax and retirement-saving strategies for your situation.
© 2024
