As an estate planner, I often hear concerns about inflation. If you scan the web for ideas on how to “beat inflation,” you will not find much. There may be limited opportunities to take advantage of inflation, for example, by not prepaying your low-interest mortgage debt, but otherwise, no magic bullet. One topic is largely neglected in this context: Gifting money to deserving family members to get an education or use it for yourself. Here are my thoughts.
Educating others – Give the gift of higher future earnings
It is no secret that higher education increases one’s lifetime earnings potential, some majors more than others; STEM and Health Care degrees generally do best. If you have family members on the fence about going to school, encourage them to do it now if you have confidence that they will apply themselves: Tuition will go up, and lifetime earnings will decrease if they wait. Offer them your financial support. You can pay unlimited tuition directly to the school (tuition only, not room and board) without incurring gift tax. If you are very wealthy, this may, in addition, lower your estate tax. We cover tax credits for the less affluent later.
You may know that gifts are tax-excluded (tax-free) if they do not exceed the annual exclusion amount (for the 2021 tax year, $16,000); anything above this amount gets deducted from your lifetime gift and estate tax exemption (see our prior post here). However, as stated, direct tuition payments are excluded for any amount.
Contributions to 529 Tuition Savings Plans grow tax-free. They may be a better choice than a minor’s trust. Read more about 529 plans here. Contributions to these so-called qualified tuition programs do not also qualify for the educational exclusion mentioned above. However, suppose in 2022, you contributed more than $16,000 to a qualified tuition plan (QTP) on behalf of any one person. In that case, you may elect to treat up to $80,000 of the contribution for that person as if you had made it ratably over a 5-year period. You can make this election for as many separate people as you made QTP contributions (IRS). You can also establish 529 (QTP) plans for yourself and transfer the benefits to somebody else later.
If the higher education candidates in your family are a few years away from college, consider a 529 Prepaid Tuition Plan as an inflation-protected savings vehicle instead of or in addition to a 529 Tuition Savings Plan. ‘Prepaid’ plans let you buy credits or years of education at a set rate. They are available in Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas, and Washington. Tuition is guaranteed for the respective state or private schools, with some limited conversion options for other schools. Every plan needs to be carefully examined. For a general overview, go here.
Educating yourself – the gift of a better job now or a prosperous and fulfilling retirement
Lifelong learners are more likely to keep their jobs in a downturn or find a new one if laid off. The economic benefits of a well-educated workforce have not escaped the attention of our lawmakers and are reflected in the tax code. The American Opportunity Tax Credit has a maximum of $2,500 per eligible student. It can be applied to yourself, your spouse, or a dependent. The Lifetime Learning Credit is worth up to $2,000 per return. Unfortunately, these credits are phased out if your Adjusted Gross Income exceeds a certain threshold.
There are several differences and similarities between the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). You can claim both benefits on the same return but not for the same student or the same qualified expenses. See clarifications from the IRS here. For a complete guide, use the IRS publication Tax Benefits for Education For use in preparing 2021 Returns.
In addition, your employer may have a tuition reimbursement program which is a non-taxable fringe benefit (does not get added to your gross income) of up to $5,250 per year (IRS). Many have higher reimbursement limits, but the portion that exceeds the preceding amount gets added to your taxable salary.
We have not touched any educational assistance programs available through the educational institutions themselves, but these are relatively rare for adult learners.
Education for older adults, specifically those nearing retirement, may offer many intangible psychological benefits but can also make sense from a financial perspective. Certain jobs, like nurses and surgeons, may be physically and intellectually demanding and are rarely a great option as you age well beyond the average retirement age. A certificate course or self-education may allow you to branch out into a related field that may give you income and satisfaction for many years. Many judges and lawyers become mediators, physicians may become sought-after medical ethicists, general contractors may qualify as real estate appraisers, and retired executives may work as life coaches, to name a few examples.
Paying tuition for yourself or loved ones, especially for higher education, can be an essential and rewarding part of a comprehensive financial and estate plan. It’s the best thing you can do in an inflationary environment. In contrast, one of the worst things you can do is buy a shiny new sportscar on credit.
As Warren Buffet said:
The greatest investment a person can make is in their education, in their mind. Because money comes and goes. Relationships come and go. But what you learn once stays with you forever.
