Modified adjusted gross income and paying for college

How do I figure out my modified adjusted gross income (MAGI) to see if I qualify to contribute to a Coverdell ESA?

The Coverdell Education Savings Account as well as all of the various tax breaks for education require that you fall within a certain modified adjusted gross income (MAGI). For most taxpayers, MAGI is simply your adjusted gross income (AGI) from your 1040 tax forms. If you file your taxes using form 1040 then your MAGI is the AGI on line 37 and is modified by adding any foreign earned income exclusion, foreign housing exclusion, exclusion of income for residents of American Samoa and exclusion of income from Puerto Rico. If you file form 1040A then your MAGI is the AGI on line 21.

Consider transferring a custodial account to a 529 Plan

Before 529 Savings Plans were established, the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) were the best way to transfer money from you or a relative to your child and pay the least amount of taxes as possible. However, with the 529 Savings Plan you pay no taxes (and may even be able take a state deduction on your contributions) as long as the money is used to pay for college.

So consider transferring the money currently in a UTMA/UGMA into a 529 Savings Plan. Most 529 Plans accept funds from a custodial account. However, 529 Plans can usually only accept cash, which means any investments in a custodial account must be liquidated and taxes paid on the gains before they can be transferred into a 529 Plan. Be sure you estimate the taxes that you might owe should you cash out a custodial account. Also, remember that the money in a UTMA/UGMA was gifted to your child and therefore will become his or her money at the age of maturity, which is either at age 18 or 21 depending on the laws in your state. Therefore, this money can only be used to pay for your child's education and cannot be switched to another beneficiary.

For private colleges consider the Independent 529 Plan

A new 529 Savings Plan was recently launched called the Independent 529 Plan. This is a prepaid program sponsored by a consortium of more than 270 private universities and colleges. The program has the same federal tax benefits as state-sponsored 529 Plans. Under the Independent 529 Plan you purchase tuition credits at today's prices. This gives you the ability to freeze tuition at today's rate. As the cost of college increases the plan will cover the difference between what you paid for the credit and what tuition actually costs when your child is ready to attend school. As with all prepaid tuition programs the key risk is that your child may not want to attend one of the participating schools. Also, saving through the Independent 529 Plan does guarantee your child admission into any of the member schools.