Tax Planning and Saving for Children's Education

Tax Planning Paper
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Tax Planning Paper
In the provided case scenario, John considers tax planning as well as saving for his children’s college education. John is married and commands an aggregated adjusted gross income of $135,000 and a home loan of $500,000. He has many short- and long-term investments to liquidate to finance his children’s college education and does not recognize the tax implications of the decision. Accordingly, he is considering procuring a second mortgage to raise funds for his children’s college tuition and does not recognize the interest deductibility or inherent limitations of the decision. In addition, John is also considering an IRA contribution or changing to a Roth and would want to establish income limitations for the latter decision. He also enquires about potential credits accrued from reimbursing for his children’s housing, room, and tuition. A scholarly evaluation of the options mentioned above potentiates merits and pitfalls, thus warranting a critical inquiry.
Several tax implications are linked to liquidating investments to raise college tuition fees. According to the Department of the Treasury and the Internal Revenue Service’s (2020) publication 529, John leveraged specified costs on Schedule A’s itemized deductions. The miscellaneous itemized deductions constitute those that are subject to 2 percent of adjusted gross income limitations. In this case, the deductibility of investment expenses relates to transaction and depreciation charges for procuring or liquidating property, including accounting services fees. Considering John’s scenario, 2 percent of his aggregated adjusted gross income amounting to $135,000 is $2,700. Therefore, John would leverage the tax deduction in liquidating his short- and long-term investments. I would recommend that John sells off his investment to make a profit from the above tax deduction and thus put the savings into his children’s education. In addition, following the investment liquidation, John can hold the profit as Education Bond Program to make interest savings following its redemption in the year, especially in contexts where he reimburses eligible college education costs in the same fiscal year. According to IRS (2022a), a qualified expense constitutes amounts reimbursed for fees, tuition, as well as other associated expenses for the eligible student required for attendance or enrollment to college. However, John must reimburse the expenses for the academic period beginning in the tax year or the initial three months of the subsequent year.
In the second option, John is considering procuring a second mortgage or home equity financing loan to secure his children’s college education. It should be noted that home equity financing is relatively cheaper compared to other classes of debt financing. According to the Legal Information Institute (n.d.), deductions are not...