The IRS provides numerous tax breaks for higher education expenses. Tax credits and tax-deferred savings plans take some of the sting out of paying for college.
TAX CREDITS
The American Opportunity Tax Credit is available to students in the first four years of higher education. Using this credit can offset up to $2,500 of qualified education expenses per year. Students pursuing a degree or other education credential who are enrolled at least half time for one academic period are eligible. Although there are additional requirements to claim this credit, including income limitations, up to $1,000 of this credit is refundable.
The Lifetime Learning Credit (LLC) is another educational tax credit. It’s available to undergraduate and graduate students enrolled for at least one academic period in the year. The LLC isn’t limited to degree-seekers. Costs related to acquiring or improving job skills qualify. While this credit isn’t refundable, there is no limit to the number of years you can claim it.
TAX-DEFERRED SAVINGS PLANS
Qualified tuition plans, commonly known as 529 plans, come in two forms: prepaid tuition plans and education savings plans. Tuition plans allow savers to buy tuition credits at participating universities at current prices, while education savings plans use investment accounts to save cash for future education expenses.
Education savings plans are the more versatile of the two types of 529 plans. They can be used at any university and up to $10,000 per year can be used for elementary and secondary school tuition.
Coverdell Education Savings Accounts allow savers to put away up to $2,000 for each beneficiary per year that can be used for college, secondary, or elementary school expenses and qualified distributions are tax-free.
You can only claim one of the tax credits each year per student but the credit can be used together with savings plans, as long as there is no double-dipping.