Isaac O’Bannon – CPA Practice Advisor
Are your kids going back to college campus this fall? It may cost you more than distance learning, but at least the tax law provides several tax breaks for higher education, including the college savings plans. Tuition and fees are no longer deducted – the Consolidated Appropriations Act (CAA) officially repealed them – but four more tax savers are available here in 2021.
1. College Loans: There are two, not just one, college loans. In principle, you can claim one or the other, but not both.
- The maximum American Opportunity Tax Credit (AOTC) of $ 2,500 is available for qualified expenses such as tuition, room and board, books, computers, and materials for up to four years of study for each student in the family. It will expire between $ 80,000 and $ 90,000 of Modified Adjusted Gross Income (MAGI) for single filers and $ 160,000 and $ 180,000 for joint filers.
- Lifetime Learning Credit (LLC) is eligible for a maximum credit of $ 2,000 but is per taxpayer. Previously, the LLC was abolished at levels lower than the AOTC, but the CAA is increasing the margins to the same as the AOTC, starting in 2021.
The AOTC is usually preferable, especially for families with more than one school-age child.
2. Section 529 Plans: We don’t need to tell you it costs a pretty penny to send a kid to college. But there is an easy way to save if you can manage to put money aside beforehand.
Consider establishing a Section 529 plan for a young child. These tax-privileged plans are operated by the individual states. As a rule, you can use generous six-digit contribution limits for the state plan. Funds accumulate within the account without incurring any tax losses. Then when the child goes to college, distributions are tax free when used to pay qualifying expenses.
Under the Tax Cuts and Jobs Act (TCJA), a Section 529 plan can also be used to pay up to $ 10,000 in tuition in an elementary or secondary school.
3. Coverdell Education Savings Accounts: While a Coverdell Education Savings Account (CESA) does not give you the same benefit as a Section 529 savings plan, it can still be a handy savings device. With a CESA, you can contribute up to $ 2,000 per year. All future income is exempt from current tax, as are distributions for qualified expenses such as tuition and housing.
The possibility of contributing to a CESA will be abolished, but at a relatively high level. In addition, this option is also available for children in kindergarten up to the final year of high school. Think of this as an addition to other college savings plans.
4. Scholarships: If your child is fortunate enough to receive a college scholarship, there is a tax bonus. The scholarship is tax free if the student is one Applicants to an eligible school and the scholarship is used to pay tuition fees and does not constitute payment for teaching, research or other services that are a prerequisite for receiving the scholarship, unless there is a special exception.
However, be aware that the scholarship tax exemption will be lost if the money is used for other purposes such as room or board. Finally, the amount of the scholarship may not exceed the tuition fees.
Contact your professional tax advisor for additional tax lessons on higher education tax benefits.