Education tax deductions and credits, offered by dear uncle Sam, contribute to college funds and assist current college students . Learn about education tax deductions and credits today.
Two questions: Do you have kids or grandchildren? Are you looking for a way to potentially reduce your tax burden? Your dear Uncle Sam might be able to help by offering education tax deductions.
There are a number of different tax benefits for education, but they fall into two general categories:
The first thing to know is how education expense tax deductions and credits work. Each has its intricacies, especially after last year’s changes in the tax code. (Here’s a little background on the difference between tax credits and tax deductions.)
A 529 plan is an education savings plan operated by a state or educational institution. It can be used at a qualified college in any state—and now, because of the new tax law, also for K-12 educational expenses. That means tuition for private grade school can be covered by a 529 plan. These plans vary by state, but they offer federal tax-deferred growth and qualified withdrawals free from federal income taxes. There are no income or age limits, and many plans do not limit contributions. They can be a great way to help maximize your tax savings.
Parents and grandparents can each open their own accounts, or grandparents can contribute to an account in the parents’ names. Withdrawals from parent-owned 529 accounts aren’t usually considered part of your adjusted gross income and shouldn’t affect financial aid eligibility.
Amy Heller, senior specialist for retirement and 529 products at TD Ameritrade, says parents who want to use 529 plans for grade school and high school should check with their tax advisor and their state to see what state laws allow as qualified deductions. The 529 industry is still working through all the changes created by the latest law.
When thinking about a 529 plan, keep in mind some of the rules, such as a 10% Internal Revenue Service penalty on withdrawals not used for qualifying college expenses.
The 529 plan’s expansion could give Coverdell accounts a run for their money, so to speak. Before the changes with the 529 plans, a way parents could save money in tax-sheltered accounts for K-12 was through the Coverdell, and only up to $2,000 annually. Plus, the allowable contribution amount phases out between $95,000 and $110,000 for single filers and $190,000 to $220,000 for joint filers, according to the IRS.
However, Heller says parents may not want to completely ditch their Coverdell accounts. So far it appears the only qualified expense for K-12 students with 529 plans is tuition, and up to $10,000 a year per beneficiary, she says.
Coverdells may still be an option for educational incidentals like books and school uniforms.
Learn more about 529 plans and Coverdell ESAs here.
While you’re saving, don’t overlook higher education tax credits. The new tax law preserved the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC is a credit for qualified education expenses paid for an eligible student for the first four years of higher education, up to $2,500 per eligible student.
LLC is for qualified tuition and related expenses paid for eligible higher-education students enrolled in an eligible educational institution, with no limit on the number of years you can claim the credit. It’s worth up to $2,000 per tax return. Since the LLC isn’t limited to the first four years of college, it’s of particular value to students pursuing graduate degrees.
When considering education tax credits, it’s important to know the difference between a refundable and a nonrefundable credit. According to the IRS:
The LLC is nonrefundable. So although the maximum benefit is $2,000, if that figure exceeds your tax bill for the year, you may not claim the entire amount.
The AOTC is partially refundable. If the AOTC pays your tax down to zero, you can have 40% of the remaining amount of the credit refunded to you, up to $1,000.
Saving for Junior’s schooling can be tough for parents, but education deductions and tax credits might at least lend a hand.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
An investor should consider a 529 Plan’s investment objectives, risks, charges and expenses before investing. The plan’s Program Disclosure Statement contains more information and should be read carefully before investing.Investors should consider before investing whether their or their beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation as TD Ameritrade does not provide tax advice.
This material is not an offer to sell or a solicitation of an offer to buy any securities. Any offer to sell units within a 529 plan may only be made by the Program Disclosure Statement and Participation Agreement relating to the Plan.
Participation in a 529 plan does not guarantee that contributions and the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses, or that a beneficiary will be admitted to or permitted to continue to attend an eligible educational institution.This material is not an offer to sell or a solicitation of an offer to buy any securities. Any offer to sell units within a 529 plan may only be made by the Program Disclosure Statement and Participation Agreement relating to the Plan.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, and a subsidiary of TD Ameritrade Holding Corporation. TD Ameritrade Holding Corporation is a wholly owned subsidiary of the Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 Charles Schwab & Co., Inc. Member SIPC.