Tax-Smart Strategies to Pay for College
As the cost of college continues to rise and inflation soars, families are looking for ways to make ends meet. One way to do this is by taking advantage of tax breaks that can help offset the cost of tuition and other expenses.
The following are some tax-smart strategies to help you pay for college:
1. Claim the American Opportunity Credit
The American Opportunity Credit (AOC) is a tax credit worth up to $2,500 per eligible student that can be used to offset the cost of tuition and other expenses. To be eligible, you must be enrolled in an accredited college or university for at least half-time status, and you cannot have completed more than four years of post-secondary education. The amount of your AOC is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).
- Use tax-free savings accounts
If you have a child who is college bound, you can start saving for their education early by using a tax-free savings account, such as a 529 plan or Coverdell ESA. With a 529 plan, you can withdraw money tax-free to pay for qualified education expenses, such as tuition, books, and room and board. With a Coverdell ESA, you can contribute up to $2,000 per year. Contributions are non-deductible, but earnings are allowed to accumulate free of any federal income tax.
- Get a student loan interest deduction
If you have student loans, you may be able to deduct the interest you pay on those loans on your taxes. The deduction is worth up to $2,500 and is available for both federal and private student loans. There are phase out limits and this deduction will gradually reduce based on your modified adjusted gross income (MAGI).
- Claim the Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is a tax credit worth up to $2,000 per eligible student that can be used to offset the cost of tuition and other expenses. To be eligible, you must be enrolled in an accredited college or university, and there is no limit on the number of years you can claim the credit. The LLC is subject to income limitations and can gradually reduce (phase out) based on your modified adjusted gross income (MAGI) same as those of the AOC.
- Take advantage of employer-provided education benefits
If your employer offers educational assistance benefits, you may be able to use those benefits to pay for college costs. The benefit is typically a tax-free reimbursement for tuition and fees, and it can be used for both undergraduate and graduate level courses.
What about 529 Plans?
529 Plans: these are tax-advantaged savings plans designed to help families save for college. The money in a 529 plan can be used to pay for tuition, room and board, books, and other qualified expenses. Coverdell ESAs: like 529 plans, Coverdell ESAs are tax-advantaged savings plans designed to help families save for college.
Which Section 529 Plan Is Best?
With so many different 529 plans on the market, it can be hard to know which one is right for you. Here are a few things to consider when choosing a 529 plan:
- The investment options: each 529 plan offers a different selection of investment options, so it’s important to choose a plan that offers the right mix of investments for your needs.
- The fees: all 529 plans charge fees, but some plans have higher fees than others. Be sure to compare the fees charged by different plans before you make your decision.
- The state tax benefits: if you live in a state that offers tax benefits for contributions to a 529 plan, be sure to take advantage of those benefits by choosing a plan from your state.
The Bottom Line
Paying for college can be a challenge, but there are a number of ways to make it more affordable. By taking advantage of tax breaks and other strategies, you can save money on your taxes and make college more affordable for your family.
Making smart choices when it comes to paying for college can help you save money on your taxes and make college more affordable for your family. There are a number of different strategies you can use to lower your tax bill, and each one has its own set of benefits and drawbacks. Be sure to consider all of your options before making a decision, and consult with a qualified tax professional if you have questions. With careful planning, you can find a way to pay for college that works for you and your family.