Did you know that saving or paying for college has tax benefits? Here’s a brief summary of perks.
529 is a savings plan offered by states and educational institutions to help families save for future education expenses. There are two different types of 529 plans: prepaid tuition and savings. Prepaid tuition lets you lock in today’s rate for future use while the savings plan works by investing your contributions. Some of the benefits are:
• Your plan earnings are exempt from federal taxes and some state taxes.
• As long as the money is used for qualified education expenses, you won’t be taxed on withdrawals.
Deductions reduce your taxable income.
Student loan interest is tax deductible up to $2,500 for college expenses on your federal return.
American Opportunity Tax and Lifetime Learning Credits
Credits lower the amount of taxes you owe.
The American Opportunity Tax Credit is for student expenses paid during the first four years of college. Education expenses include the cost of tuition, fees and books. To qualify, students must be enrolled at least part time for one semester. To claim the full credit amount of $2,500 per student, your modified adjusted gross income must be less than $80,000 ($160,000 if married filing jointly). If the credit reduces your owed taxes to zero, up to 40% of the remaining credit (maximum $1,000) is refundable.
The Lifetime Learning Credit is worth up to $2,000 per return for tuition expenses. You can claim this credit if you, your spouse or dependents are enrolled in school and paid tuition. Unlike the American Opportunity Tax Credit, the Lifetime Learning Credit will help you pay for undergraduate, graduate and professional courses and has no limit on how many years it can be used. To claim the full credit amount, your modified adjusted gross income must be less than $67,000 ($134,000 if married filing jointly). This credit is nonrefundable.
Keep in mind that each student is only allowed to claim one of these credits per year. For parents who make too much to claim the credit, if your child has a job, let them claim it on their own federal tax return.