Affluent families sending children to college don't typically think of filling out financial aid applications: They assume they won't qualify for help, and for good reason.

Specifically, their obstacle is the expected family contribution, the annual amount parents are expected to pay for their dependent children's college expenses before becoming eligible for aid.

For example, if the expected family contribution is $25,000 and the cost of attendance is less, the family cannot qualify for needs-based financial aid. Since most scholarships, grants and government-subsidized loans are based on financial need, unless the student is an exceptional scholar or has unusual athletic prowess, the family is forced to foot the entire cost.
One might argue this is fair. After all, why should the government underwrite the education of a kid whose family earns a couple hundred thousand dollars a year and has garnered a quarter million in assets (excluding their house)? Their lot seems pretty rosy.

And yet maybe it's not as rosy as it sounds. Wealthy people often face a catch-22: They are reaching their highest earning potential only when their children are reaching college age. They might have experienced lean years, but then their later success, in effect, disqualifies them from traditional college help.

Let's take, for example, a hypothetical couple, Mike and Becky Miller, a modestly affluent couple in their early 40s. Mike owns a small advertising agency and Becky practices family law. Since Becky worked only part time when the children were young, her law practice is still in the client acquisition phase. Their combined gross income after business expenses is $200,000 to $250,000.

With three children, ages 15, 12 and 10, Mike and Becky anticipate college and graduate school expenses of $400,000 to $500,000 in today's dollars. They will start paying these expenses in their mid-40s to late 50s, in what they hoped would be their prime saving and accumulation years. They face a quandary: How do they fund their retirement plans and simultaneously help their children complete their education with minimal debt?

Mike and Becky realize that because of their financial success, society expects them to pay the full price of their children's education. But because they are in a high tax bracket and their effective tax rate will increase in the foreseeable future, they will devote much more in pretax earnings to their educational expenses than the average family would.

The good news is that the Millers might be able to turn their financial aid disqualification into an advantage. By focusing on IRS rules rather than financial aid rules, they could take maximum advantage of the available tax opportunities, including the children's lower income and capital gains tax rates, the children's personal exemption, 529 college savings plans, education tax credits and IRAs (both the traditional and Roth versions).

Tax Dependent Strategies
The IRS considers any full-time student children under 24 to be dependents of the parents. The exception to this rule is children who provide more than one-half of their own support. The word support is broadly defined to include not only food, clothing and shelter, but also educational expenses, health insurance, car repairs, etc.

Children of an affluent family can ease their tax burden if they are independent of the parents for income tax purposes. Children who meet the one-half support test are able to claim the personal exemption ($3,650 for 2010) and the standard deduction ($5,700 for 2010) and they can benefit from a low 10% tax rate on the first $8,375 of their taxable income and a 15% rate on the next $25,625 (the tax rate for singles for 2010).

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