As we all know, the process of getting divorced is a difficult one, and can often be contentious and adversarial. It\u2019s no wonder, then, that the separating couple often doesn\u2019t fully explore the alternatives for paying for their children\u2019s college costs.<\/p>\n
Here are some points to consider.<\/p>\n
Who can, and who should, claim the child as a dependent for tax purposes? Federal student aid calculations are based on the assets and income of the custodial parent. As a result, the division of assets, and assumptions about future income and expenses, should take the education needs of the children into account.<\/p>\n
Under federal guidelines, need-based aid and qualification for the American Opportunity Credit are determined by the assets and income of the custodial parent. Currently, IRA assets and 401(k) savings need not be disclosed by the applicant. <\/p>\n
The American Opportunity Credit is only fully available if your income is below $90,000 for those taxpayers filing \u201cSingle\u201d or \u201cMarried Filing Separately\u201d, or below $180,000 if filing \u201cMarried Filing Jointly\u201d. The credit is a maximum of $2,500 per year for up to four years. Children of a qualifying custodial parent may also qualify for subsidized loans with a lower expected family contribution. A qualifying custodial parent may also take a $500 exemption credit every year claimed, or $2,000 over 4 years. <\/p>\n
If more than one child is in college, qualification for aid can lower the expected financial contribution and result in a second American Opportunity Credit on the custodial parent\u2019s tax return. The obligation for the cost of education may drop significantly as additional children enter college.<\/p>\n
Finally, when dividing assets in a divorce, the type of assets allocated to the custodial parent may affect qualification for financial aid. With 401(k) and IRA accounts currently not disclosed or considered for federal aid and American Opportunity Credit qualification, allocation of an unequal amount of such assets to the custodial spouse may materially reduce future financial liability for the children\u2019s cost of college.<\/p>\n