As the economy struggles to recover, education costs continue to climb. This has placed financial pressure upon parents who have chosen to pay for their children’s college tuition. Equal pressure is being felt by many adults who are now turning to education in order to find better jobs. Believe it or not, there are ways to help alleviate this strain.
Traditionally, most people utilize various forms of Financial aid (student loans, grants and scholarships) to help pay for education costs at the collegiate level. However, financial aid can still leave students with a high amount of debt. What many people do not realize is that the answer to help paying for college lives within the Internal Revenue Code. For instance, did you know that there are several types of tax deductions, tax breaks and dedicated savings plans available that can help offset or prevent college debt?
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5 College Education Tax Deductions Are 5 Tax Deductions You Should Know About
Deduction for Work-Related Education: This is a tax deduction available for employees who itemize deductions. You may be able to claim a deduction for expenses incurred for work-related courses.
Student –Loan Interest Deduction: This is a great deduction for someone who’s begun to pay back their student loans. If you fall into this category, you will be eligible to deduct up to $2,500 from your tax return, per year. According to Tax Tips from H&R Block®, this type of deduction creates an adjustment to your income and you can “claim the deduction even if you do not itemize deductions.”
Employer-Provided Education Assistance: If your employer provides tuition reimbursement, up to $5,250 does not have to be reported on your taxes. Here’s a helpful tip from “Back to School” an article that ran last year in the Wall Street Journal, “A family business might be able to provide this assistance to a relative who works in the business, if he or she doesn’t own 5% or more of the business.”
American Opportunity Credit: Available through 2012, this credit can offset up to $2,500 of your taxes per qualifying student. A qualifying student is defined as someone enrolled at least half-time in an undergraduate degree program. Up to $1,000 of this $2,500 tax credit is eligible for refund. Therefore, it is possible to receive a refund of $1,000 if you do not owe on your taxes. Graduate students and convicted felons do not qualify for this credit.
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Lifetime Learning Credit: This tax credit can be applied to students enrolled in undergraduate or graduate degree programs, unlike the American Opportunity Credit. It can be used to offset up to $2,000 in taxes per year, per family. Qualifying expenses include undergraduate and graduate college tuition, fees and some continuing education courses that can help improve job prospects.
Not all of these deductions or credits can be used at the same time. You must pay careful attention to the rules such as not being able to claim the same expenses across each deduction.
Planning Ahead Never Hurts
If you are a parent or grandparent looking to create a savings plan to help pay for a child’s future tuition, there are several options to choose from.
State 529 Plans (also known as pre-paid college funds): These are very popular plans; rules may vary by state. Funds from the plan can be used at participating educational institutions toward various types of education costs such as student housing, fees, as well as in-state and out-of-state tuition.
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Coverdell Education Savings Accounts (ESAs): Tax Tips from H&R Block® defines ESAs as “tax-advantaged accounts that allow you to save money for education.” There is an annual contribution cap at $2,000 per student. Two things to note: the money deposited into this type of ESA will grow tax-free until you withdraw it and you cannot deduct contributions from your taxes. What’s good about them? You can use the earnings tax-free for qualified education expenses.
IRAs: Did you know that you can make a withdrawal from a traditional IRA (before the age of 59 1/2) without facing a 10% penalty? It’s true, as long as the funds are going toward higher education costs such as tuition, books, supplies, or housing. There is one stipulation, the student you are paying for must be enrolled in their higher education program at least half-time.
When it comes to making your hard-earned money work for you, these tax deductions and savings plans are just the tip of the iceberg. Due to the complexities of tax law and financial planning it is strongly recommended that you seek professional advice.
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