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Attending College

Attending College

One of the largest expenses that you will encounter is paying for college. Being aware of potential tax savings can help to reduce the burden of tuition. Let’s explore common ways to reduce your taxes.

Saving for college – an overview

Qualified tuition plans are sponsored by states, state agencies and educational institutions. There are two types of education savings plans, also known as 529 plans: prepaid tuition plans and education savings plans. Prepaid tuition plans allow you to purchase credits at current prices and are quite limited in scope. Education savings plans are made through setting up an investment account and can be used for a greater variety of college related expenses.

Saving for college – tax benefits

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.

Attending college – tax credits

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.

After college –student loans

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.

Be sure to discuss any education related payments for you or your dependents with your accountant to maximize your tax savings!

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