Did you know that paying for higher education costs could lower your federal income taxes? For 2011, several changes have been made to the IRS tax code, making it not only easier to attend college, but for parents to take advantage of much needed tax savings.
529 Plans- Expanded Options
A 529 college savings plan refers to a specialized program designed to pay for higher education costs. Funds are placed into the account on an after-tax basis and if the funds are used to pay for qualified higher education expenses as outlined by the plan, withdrawals, including gains, can be taken on a tax-free basis.
For 2011, options for how a 529 plan can be used to pay for higher education have been expanded. In addition to paying for costs such as tuition and expenses, now funds contained within 529 plans can be used to pay for computers and Internet access. Be sure to check with your 529 plan provider or tax consultant for a full list of eligible expenses.
American Opportunity Tax Credit
The American Opportunity Tax Credit is a new and improved version of the Hope Credit, available to filers with students currently attending college. The credit could provide as much as $2,500 in tax credits per student for filers that qualify. For 2011 and 2012, this credit can be used annually, over the course of four years. Full tax credit is available for those filers earning less than $80,000, or those married filing jointly who earn less than $160,000 annually.
For those who may not qualify for the American Opportunity Tax Credit, the Lifetime Learning Credit may be an available deduction. This credit allows filers to deduct 20% of their total college contribution, up to a maximum of $2,000 per student.
For more information about the available education tax credits for 2011, be sure to consult your tax advisor.
Ray is an ex-financial adviser and the founder of Financial Highway. Currently working in the financial industry and working towards completing his Chartered Financial Analyst, CFA, designation.