Until you have a child applying for or attending college, the high costs may not seem real. That changes quickly when paying for college becomes personal. Don’t forget to shop around for tax breaks on college expenses.
There are two tax credits for qualified higher education expenses (tuition and certain related expenses). The American Opportunity Tax Credit can be as much as $2,500 per student and is available for any of a student’s first four years of college. The Lifetime Learning Credit is available for each year of post-secondary education, including graduate school and eligible job training. The maximum credit is $2,000 per taxpayer return (not per student).
You cannot claim both credits for the same student’s expenses for the year. And the credits are reduced or unavailable if adjusted gross income (AGI) exceeds specified limits.
Scholarship money is generally tax free as long as certain conditions are met. Most importantly, the scholarship must not be compensation for services your student performs (exceptions apply). Also, the money must be used for tuition, fees, books, supplies, and equipment required for coursework.
Grandparents are sometimes in a good position to help with college costs. A grandparent can give a grandchild up to $14,000 this year without having to file a federal gift-tax return.* Or, tuition payments (any amount) could be made directly to the college with no gift-tax consequences.
The interest on qualified education loans is tax deductible up to a maximum of $2,500 annually. The deduction phases out when AGI exceeds specified limits.
You can withdraw money from individual retirement accounts (IRAs) to pay for college without having to pay the 10% early withdrawal penalty that usually applies before age 59½. However, distributions from traditional IRAs are subject to income tax.
* Assumes a return is not required for another reason