Going to college and earning a degree can be a great way to expand your knowledge and education and open up new professional opportunities. While there are plenty of benefits that come with expanding your education, many people will be concerned with the total costs associated with it.
Today, going to college can easily cost over $100,000. Fortunately, there are some tax advantages and credits that can be used to help offset some of these costs. There are various education tax credits and deductions that you should be aware of that could help you reduce your federal and state taxes.
One tax benefit that you can take advantage of to help offset higher education costs is the American Opportunity Credit. This tax credit was first introduced in 2009 and continues to provide tax advantages. Today, you can receive up to $2,500 per year in total tax credits.
This works by providing a direct $2,000 credit against the first $2,000 you spend on qualified expenses, such as tuition, books, and room and board. It will then provide a 25% credit against the next $2,000 of expenses. There are phase-outs of this credit if your income exceeds a certain amount.
Another tax benefit that can help to save some money is the Lifetime Learning Credit. This is a unique tax benefit as it is not limited to just the first four years of college. Instead, you can use it over the course of your life as you look to improve your education and job skills. The tax credit will provide a credit of up to $2,000 over the course of your life.
This is based on a 20% credit of up to $10,000 of eligible expenses. While the American Opportunity Credit requires you to be at least a part-time student, the Lifetime Learning Credit does not. The only stipulation is that the money is spent at an eligible institution. There are also income phase-outs of this credit to be aware of.
Another way that you can reduce your tax liability while paying for higher education is to establish a 529 account. A 529 account can be set up in your own name, or in the name of someone that you are saving for.
When using a 529 plan, the money will be put into the account on a post-tax basis. The advantage of this is that you will be able to withdraw the funds from the account without taxation, which can help you avoid capital gains tax if the money has appreciated in value.
Another advantage of using a college savings plan is that contributions could be deducted. Depending on the state that you live in, you may be able to deduct the contributions you make from your annual income. This will reduce your total tax liability. It is important to ensure you are using the right account when applying for this contribution.
An IRA is typically used to save for retirement. However, there are situations when you can withdraw funds from the account without penalization. One qualifying withdrawal tends to be using proceeds to pay for higher education costs. While you will still be taxed on money that you have taken out, you will be able to avoid the 10% penalty.
Many students today that leave college will take on some student loan debt. While making these payments can seem difficult at the time, there are some tax benefits associated with it. Today, you can deduct up to $2,500 in student loan interest, which will be used to reduce your taxable income. There are phase-out rules in place to be aware of before trying to take this tax benefit.
Finding ways to save your hard earned money are important, especially when it comes to education. When you are looking to reduce your costs and limit your tax burden, using various federal and state tax credits and deductions is a good idea. There are various tax advantages available that you should take advantage of to help reduce your tax bill.
Reach out to the MB Group today for assistance for all your tax related needs so you can start taking advantage of these tax credits. Contact our team here.
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