Tips for Parents Saving or Paying for College
As the cost of higher education continues to climb, it is important for parents to use every resource available to ease the burden. It is never too late to begin planning for your child’s education.
Do you want to start saving for your child’s college expenses?
Consider a Section 529 Plan
- Funds in the plan grow tax free if used for qualified education expense
- Iowa’s 529 plan allows a limited Iowa income tax deduction for your contribution to the account. Thus, even short-term funding into and back out of the plan can yield a tax benefit.
- Plans are generally state-sponsored but can be used for college out of state
- 529 Plans have no income limitations
- They are easily transferrable to another beneficiary if needed
- Students can even pay for room and board out of a 529 plan
Do you already have a child in college?
Fall semester has begun. When paying tuition and other expenses, be sure to always save receipts and be aware of tax benefits that will help ease the cost of college. It may also be helpful to have online access to your child’s financial account so you can obtain printouts of charges, scholarships and payments. Be sure your student provides you with any forms 1098-T and 1099-Q they receive.
Here are a few tax credits you might qualify for if you or your child is currently in college:
American Opportunity Credit
- This credit is available for 2009 through 2012
- It can be up to $2,500 per eligible student
- Eligible expenses includes tuition, books, supplies and equipment
- Available for the first four years of post-secondary education
- Student must be taking at least one-half of a full-time workload
Lifetime Learning Credit
- Maximum credit is $2,000 (20% of the first $10,000 of eligible expenses)
- No limit on the number of years you can claim
Tuition and Fees Deduction
- Can reduce the amount of income subject to tax by up to $4,000
- You can claim tuition and fees deduction for eligible college expenses (primarily tuition & fees)
Note: Your eligibility for these tax benefits depends on your adjusted gross income and varies for each.
Are you or your child done with school and have begun to repay student loans?
Student Loan Interest Deduction
- Can allow you to deduct interest paid on a student loan
- Can reduce your amount of income subject to tax by up to $2,500
- Adjusted gross income must be less than $75,000 (or $150,000 if filing jointly)
Saving for college and paying back student loans can all be a little overwhelming, but you can lighten the burden by using all strategies available to you.
Other things to remember:
These tax benefits are generally available to parents of a dependent student regardless of who actually pays them and regardless of whether they are paid with borrowed funds or not.
In some cases it may make sense for them to be claimed on the child/student tax return. Such a determination requires a coordinated approach. If your child has income on their own return, you should consider having your child delay filing until your preparer has a chance to review both you and your child’s tax information together.
To optimize your tax benefit, both state and federal tax returns must be considered as well as the coordination among each of these alternatives. Your tax professional at Terry Lockridge & Dunn is well equipped to guide you.
If you have any questions on these tax benefits or you are wondering what other strategies you can use to save money, please contact our Cedar Rapids office at (319) 364-2945, our Iowa City office at (319) 339-4884 or email us at info@tld-inc.com.