Tax Breaks For Parents of College Students

tax breaks

It’s tax season, and the April 15th filing deadline is fast approaching. If you’re a parent of a college-bound or current student, there are several tax breaks and tax-friendly strategies that can help ease the tuition burden, including tax credits, deductions, and a tax-advantaged 529 savings plan.

Tax Breaks

First, it’s important to set yourself up for receiving the most beneficial return by keeping the following in mind when filing:

  • Education Tax Credits. Parents can claim tax credits on a per-student basis. The two education tax credits currently in effect are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). With the AOTC, students or parents can claim up to $2,500 for expenses for tuition and fees, textbooks, and supplies, for the first four years of college. 40 percent of this credit is refundable, which translates to getting up to $1,000 back in a refund. Couples filing together who earn less than $160,000 or single filers who earn less than $80,000 qualify. Then, there’s the LLC, which allows single filers making less than $60,000 or married couples earning less than $120,000 to claim up to $2,000 of education-related expenses.
  • Tuition & Fees Deductions. Similar to the AOTC, single filers who make below $80,000 and joint filers making less than $160,000 can deduct up to $4,000 in eligible tuition and fees annually.
  • Student Loan Interest Deduction. If you’ve taken out a qualified student loan, you can deduct up to $2,500 worth of interest paid on the loan as an “above-the-line” exclusion from your income, and you don’t need to itemize your deductions to claim it.


Tax Advantaged Savings Plans

If you’ve already filed or received your return and are in the process of looking for ways to save for your dependent’s tuition, consider tax-advantaged savings plans.

529 Plans

529 plans are designed to help families save money proactively for future college costs.

With a 529 plan, the owner remains in complete control. Every state along with some educational institutions sponsor a 529 plan. There are two types, known as college savings plans and prepaid tuition plans. Investment options, expenses, and other specifics vary depending on the state.

While contributions to either type are not tax deductible, they offer tax benefits that other college savings methods don’t.

  • You never have to pay tax on the income your investment earns each year.
  • As long as withdrawals are only used to pay for qualified education expenses, including books, tuition, mandatory fees, room and board, and equipment, you never have to pay income tax when the money is taken out.
  • Deposits up to $14,000 per individual per year qualify for the annual gift tax exclusion.

When it comes to making contributions, you can claim state tax benefits with each contribution. In other words, you should continue to keep making deposits up until you’ve paid your last tuition bill. This is also an excellent opportunity to put your refund to good use by contributing in lump sums with your tax returns.

Coverdell Education Savings Accounts

Coverdell ESAs work a lot like Roth IRAs, allowing you to make annual non-deductible contributions to an investment account.

The account grows tax-free and can be used for higher education costs as well as elementary and secondary school expenses. Also, withdrawals are not reported as student or parent income as long as it is tax-free for federal income taxes. There are, however, some eligibility requirements and other items to be aware of, including:

  • If not used for college, contributions will eventually be distributed to your child.
  • You can only leverage ESA funding if the dependent is under 18 years old.
  • If the account is not entirely withdrawn by the time the beneficiary reaches 30 years of age, it will be subject to tax and penalties.

Unlike 529 plans, they are more high maintenance and come with some other eligibility requirements and considerations to keep in mind.

So tell me have you heard about these tax breaks and do you think that you would use them?


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