Attending College

Most benefits for contributing to an education savings plan are provided at the state level. Each state will have its own benefits, but they typically include a deduction on your state tax return to reduce your state taxes or by a matching grant. Withdrawals from education savings plans are not taxable as long as they are used for qualified education expenses.

There are currently two types of federal tax credits available while you are attending college: American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC can be used for the first four years of higher education for a maximum of $2,500 per year. The best part about the AOTC is that even if you don’t pay any income tax for the year, the IRS will still refund you up to $1,000! The LLC is usually taken after you have used all four years of the AOTC as it has no limit on the number of years that you can claim the credit and you can still reduce your taxes by up to $2,000 per year.

Paying interest on your student loan is never a fun activity, but at least there is still a tax benefit available to you. As long as your income is below a certain threshold, you can use the interest portion of your payments to reduce your taxable income up to $2,500 per year – which can definitely add up over time.