While obtaining a higher education can be costly, there are certain programs and tax credits available to make it easier. With the proper financial planning, you can set your child up for a successful college career without the massive debt. Here are the top five education tax credits your college student may be eligible for.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) provides a maximum annual credit of $2,500 for eligible students and their families. Qualified expenses and fees incurred for college include tuition, textbooks, and other course materials needed for the first four years of higher education. Your income will determine eligibility for a full or partial credit, but be sure to keep all necessary documents and receipts when claiming the AOTC. If your credit is incorrect on your tax return, you will have to pay back the amount you received in error with interest. Seeking tax help from a qualified accountant can help ensure everything is filed correctly, so you can reap the full benefits.
Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is worth 20 percent of the first $10,000 spent on qualified tuition and education expenses, or a maximum of $2,000 per return. This can include undergraduate, graduate, and professional degree courses, depending on your income. While not refundable, this credit can be put towards any taxes owed. The LLC cannot be claimed in combination with the American Opportunity Tax Credit detailed above, and vice versa. It is one or the other. According to the IRS, students should receive a Form 1098-T, Tuition Statement, from their school by January 31 for these education credits.
Qualified Tuition Program / 529 Plan
A 529 Plan isn’t exactly a tax credit, and contributions are not deductible. However, “earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college,” according to Saving For College. Unlike other programs, a 529 Plan is also not dependent on your income.
A 529 plan is in your name, not your child’s, and it allows you to begin investing in their future from a young age. The amount you can contribute per year will differ based on the state you live in, so do your research before you open the account. Using a 529 Plan is a great financial planning option, because it may prevent your child from needing to take out costly private loans.
Coverdell Education Savings Account
A Coverdell Education Savings Account (ESA) is a trust or custodial account opened in the name of a student. A person can contribute up to $2,000 annually to this account. There are no tax deductions available for contributions, but the funds can be withdrawn tax-free in order to pay for college tuition and related expenses. Depending on your current income and what state you live in, consider consulting with your accountant to determine what kind of higher education savings account will be best in the long run.
Planning to pay for college can be overwhelming. Thankfully, these education credits and savings options will help you to begin investing in your child’s future without the heavy financial burden. As always, seeking tax help and advice from an accountant is also a wise decision and can help you determine the best ways to save the most money.
Drake Tax Services has been serving the greater Philadelphia area since 1997. Its founder, Anthony F. Drake, is a professional accountant and IRS approved tax preparer who specializes in local, state and federal tax returns for both individuals and small businesses.
