Parents facing college expenses have several provisions in the tax law to consider. The benefits don’t apply to all, but there is something of interest for many families.
Tax credits
The American Opportunity Tax Credit is available for certain tuition and fees, and it allows you to reduce taxes annually up to $2,500 per student for four years of college. The credit is equal to 100% of the first $2,000 of qualified expenses and 25% of the next $2,000.
The Lifetime Learning Credit covers any year of post-secondary education, with a maximum credit of $2,000, no matter how many students in the family are eligible.
Both the American Opportunity Tax Credit and lifetime learning credits phase out for taxpayers with higher incomes.
Other education tax incentives
Individual retirement accounts (IRAs). Existing IRAs can also be a source of college funds. You may make withdrawals before age 59½ without penalty for amounts paid for college or graduate school tuition, fees, books,room and board, supplies, and equipment.
Education savings bonds. Interest on Series EE and Series I bonds issued after 1989 is nontaxable when used to pay tuition and fees for you or your dependents. This tax break begins to phase out once income reaches certain levels.
Section 529 plans allow individuals to set up an account on behalf of someone else (say a child or grandchild) that can be used to pay college expenses. There are two types of plans:
Prepaid tuition. Prepaid tuition plans are designed to hedge against inflation. You can purchase tuition credits, at today’s rates, that your child can redeem when he or she attends one of the plan’s eligible colleges or universities. Both state and private institutions can offer prepaid tuition programs. Using tuition credits from these programs is tax-free.
College savings plans. College savings plans are state-sponsored plans that allow you to build a fund to pay for your child’s college education. Your contributions are not tax-deductible, but once in the plan, your money grows tax-free. Provided the funds are used to pay for qualified college expenses, withdrawals are tax-free. Qualified expenses include tuition, fees, books, supplies, and certain room and board costs. Private institutions are not allowed to set up college savings accounts.
Student loan interest deduction. Interest on certain student loans can be deducted whether or not you itemize your deductions. The maximum deduction is $2,500 per year over the loan repayment period.
Other tax benefits. Most scholarships remain tax-free, nontaxable employer-paid tuition may be available, and education expenses related to your job still may be deductible.
When you start examining your situation, remember that many of these provisions are designed so that you can’t benefit from more than one in any given year. We can help guide you through the maze and help ensure that you receive the maximum possible benefit. Schedule time with our team here: https://www.bas-pc.com/appointment-center
Get More Info : Visit Here : https://www.bas-pc.com/
BAS is the trusted accounting firms in New Jersey that has been providing excellence in servicing accounting, payroll, and tax needs of small businesses.
Get More Info : Visit Here : https://bas-pc.com/contact-us/