The $5,000 tuition payment/gift, the $5,250 from the tuition assistance program and the $10,000 from the 529 plan are all income tax free to Scott and his family. His father's business even gets a tax deduction for the tuition assistance program payment.
Scott has $12,000 in earned income and $1,750 in interest income, a total of $13,750 in taxable income, none of which is subject to the kiddie tax. After he applies his standard deduction of $3,650 and his personal exemption of $5,700, Scott is now left with taxable income of $4,400. At a 10% federal income tax rate, Scott would owe $440 in taxes. With his eligibility for the Hope Scholarship Credit, his tax liability falls to zero.
Hopefully the tax "scholarship" for the children will enable Mike and Becky to continue their tax-deductible retirement plan contributions.
David M. Dalton, JD, CFP and Megan R. Dalton are partners with Dalton Wealth Management in the Cincinnati/Dayton, Ohio area. Contact the authors at [email protected] or www.DaltonWealth.com.