As college costs continue to rise, it’s important to explore tax planning strategies and education credits that can help manage tuition and expenses more effectively. According to 2024 statistics, the average cost of attending an in-state college is a total of $108,584 for four years, and that number climbs to $182,832 for out-of-state students and up to $234,512 for private universities. As such, it’s no wonder that parents and students are continually looking for opportunities to cut costs, and financial and tax planning can accomplish that.
One of the advantages of tax planning is that parents and their children can mitigate the high – and continually rising – tuition costs by identifying tax credits and deductions that apply now and for the years ahead. If college is in your immediate or even distant future, then consider these tax credits and potential opportunities to save on years of expenses.
Understanding the Available Tax Credits for College Tuition
Several educational tax credits provide relief to families and individuals interested in higher education. However, unlike a deduction, which lowers your taxable income in a given year, these credits reduce your tax bill overall.
Here are two college-related tax credits to consider as you conduct your tax planning for 2024.
American Opportunity Tax Credit
The American Opportunity Tax Credit is an education-focused tax credit that can be worth up to $2,500. It’s available for students in their initial four years of college, trade school, or another qualified educational institution.
To qualify, the student or parents must pay for the tuition beyond what scholarships cover. This payment allows eligibility for specific benefits. Some additional expenses, like room and board, do not qualify for this distinctive credit.
Lifetime Learning Credit
The Lifetime Learning Credit is a solid option for students and families who may not qualify under the stricter guidelines of the American Opportunity Tax Credit.
The Lifetime Learning Credit allows students to claim up to $2,000 for education expenses, provided that they are taking courses at an eligible educational institution, seeking a degree or other credentials, or looking to enhance their job skills.
To qualify for this credit, the student must enroll for at least one academic period during the tax year. As the name suggests, the Lifetime Learning Credit is a good option for students who are continuing their education outside of a university setting by taking job-related courses or classes to improve their skills.
Additional Tax Opportunities to Consider
There are other potential deductions and credits to keep in mind when furthering your education. A sample of some of the more popular tax planning opportunities is below.
- Student loan interest deduction – You can deduct up to $2,500 in student loan interest that you paid during a given year, if you are legally obligated to repay the loan in the future. (Note that annual income limits may apply.)
- 529 plan – A 529 plan is an investment or savings account plan designed for education and can be used to offset tuition costs in the future. You won’t get an immediate federal tax break on a 529 savings plan, but many states offer tax incentives, and the funds within the investment account grow on a tax-deferred basis. Later, if you use the money for qualified educational expenses, all withdrawals will be tax- free at the federal level (and also on the state level for most of the country.)
- Work-related education expenses – You may also be able to deduct the cost of work-related education expenses paid during a given year if you are self-employed and your educational ventures maintain or improve skills needed in your present work. Other scenarios and caveats apply, and it’s important to understand how possible deductions for work-related educational expenses are calculated to avoid a potential IRS audit.
Maximize Your Savings with Tax Planning for College
The importance of tax planning carries over into all stages of life, but this is especially true when you are planning for you or your child’s education.
By examining your opportunities now, you can have a clearer idea of the expenses – and savings – for the road ahead. You will have a better ability to budget, regardless of your child’s long-term collegiate ambitions.
Reach out to the tax experts at Saddock Advisory today to start the conversation. Our financial experts will guide you to look at opportunities now and, in the years ahead to save well into the future. When it comes to tax planning and financial preparation, you need expert guidance through every one of life’s milestones, and the professionals at Saddock Advisory are standing by to help every step of the way.
Discover how strategic tax planning can reduce your college costs.
