There is a wealth of options when it comes to tax planning strategies for college students, which can start years before a child starts filling out their college applications. Tax planning and preparation can go a long way to lighten the financial burden of a college education. We will also explore different options, like tax-free tuition to student loan credits, that can benefit families.
So, before you head off to school for the fall semester or start thinking about majors and preferred colleges years down the road, consider these tax planning tips and ideas that will allow college students and parents to put a little money back into their pockets when the 2024 tax season rolls around.
529 College Education Savings Plan
Most investment income is taxable, but when it comes to saving for a child’s education, the income you earn from a 529 college savings plan is generally not. Any contributions to a 529 college education plan are not taxed along the way toward the college years, and some states even allow deductions on these regular contributions.
When it’s time to withdraw, a 529 plan can also be used for private education from grades K-12, vocational or trade schools that aren’t necessarily four-year universities, and traditional college expenses like tuition and books. You won’t pay federal taxes on any of these withdrawals, depending on the type of individual 529 account. A tax preparation services provider can help ensure you choose the right plan for your future.
The American Opportunity Credit
The American Opportunity Credit is one of the most popular federal tax credits for current college students and their parents. It allows students (or parents claiming their college student as a dependent) to enjoy a hefty deduction for up to four years.
Essentially, tax filers can claim a credit of up to $2,500 towards tuition and other expenses like books and supplies (although not living expenses or travel). Tax filers that make less than $80,000 per year or less than $160,000 per year if married and filing together may be eligible.
Lifetime Learning Credit
The Lifetime Learning Credit is similar to the American Opportunity Credit. However, it offers a little more flexibility regarding annual taxes. This credit allows parents or students to claim a credit of up to $2,000 for tuition and expenses. But there is no limit on the number of years the credit can be claimed. In addition, the Lifetime Learning Credit can be helpful in continuing education, as it can be used for vocational schools, graduate or post-graduate studies. It can also be used for educational opportunities that help individuals improve their job skills.
Student Loan Interest Deduction
After graduation, there are opportunities to minimize your taxes for years to come, particularly for students or parents who have student loan debt. Students or parents can deduct up to $2,500 of the amount of interest that is paid on a qualified student loan year after year, and typically for the life of the loan, for as long as payments are made.
Keep in mind that the above opportunities are the tip of the iceberg when it comes to potentially saving on your taxes. Additionally, there are plenty of other routes to minimize your taxes before, during, and after a college education. The IRS has a length and nearly 80-page publication on these distinct options and guidelines for students. It can be a helpful resource when it comes to answering questions now and well into the future.
Create a Smart Tax Planning Strategy with Professional Tax Experts
When it comes to education-based credits and deductions, federal tax law is constantly changing. Opportunities that exist now may disappear or change in the years ahead, and new options may pop up to give parents and students a financial boost.
Smart tax planning for individuals, including current and soon-to-be college students, begins with an experienced and exceptional guide.
At Saddock Advisory, we help families, businesses, and students create tax planning strategies for all stages of life, and that certainly includes the all-too-important college years.
Whether you or your child is a current college student, or you want to get a big jump start on planning for your child’s education, we can help. Tell us about your college savings, expenses, and other challenges, and we’ll work together to create an individualized tax planning strategy that will help reduce your costs in the coming tax season and for many years ahead.