How to Pay For Your Kid’s Education

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One of the questions I’m sure to get from parents is “How can I pay for my kid’s college education?”

Sometimes the question actually means, “Oh, no, what do I do now? She’s 17 and I don’t have a dime saved!” And sometimes it means, “How can I turn the cost into a tax deduction?” Today, I want to review a couple of the ideas that I share with my clients.

You might have had heard about the Educational IRA or the 529 Plan. And, of course there are grants and scholarships. But, if you have a business and are paying too much in taxes, how about paying for college and getting a tax break too?

One easy way is to pay your child a salary for work they actually do in your business. Three rules here: (1) Have a written job description (2) Have your child keep track of the work performed and (3) Pay a reasonable salary for the work they do.

This doesn’t always work if your child attends school away from home. Another idea might be to take some of your assets that you use in your business such as equipment, vehicles, and the like and put it in an LLC. Your business then pays rent to the LLC. That’s a deduction for your business and income for the LLC. Now, here’s the part that is great. Gift part of the LLC to your child. They now have a stream of passive income that can be used, by them, to pay for college. You’ve gotten a deduction at your higher tax break and they now have the cash for college.

Some warnings here: Make sure you child is 18 years of age or older or they face kiddie tax. (Your tax rate) Their could be gift tax due if the gift to your child is too big. Do it instead in phases. Make sure your business pays a reasonable wage. Above all, get an experienced advisor helping you with this, and all other tax strategies.

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