Whether you're a college student yourself or the parent sending on off, it's an expensive proposition. Between the rising cost of higher education, the cost of living near campus, or the never-ending need for supplies, your wallet can definitely take a real hit.
So, how can you help ensure that you cover those expenses with the least stress? One way is to make sure you're getting the most out of your taxes during this time. Here are 4 ways to do just that:
Claim Education Credits
There are two main education credits available for those paying for college: the American Opportunity Credit and the Lifetime Learning Credit. Be sure you claim the American Opportunity Credit first since it can only be used during your undergraduate years and it's the only education credit that can result in a refund if you owe no taxes.
If you're not sure how to claim these income tax credits--or if you need to go back to prior returns to claim them--you may want to work with a qualified accountant who has experience in family tax planning.
Use Money from Tax-Advantaged Sources
If you will be paying for college costs out-of-pocket, keep in mind that some tax-advantaged savings plans can help. A state-sponsored 529 account, for example, is not taxed when you withdraw money for qualified education expenses. Similarly, you can generally withdraw contributions from a Roth IRA plan without incurring a tax penalty.
If you have a traditional IRA instead, you can likely also withdraw money solely for college tuition without an additional penalty. You would only have to pay regular income taxes on the withdrawal.
Decide Who Will Claim the Student
When a dependent goes off to school, the parent or guardian may still be able to claim him or her as a dependent if they are still providing the cost of the student's home. However, it may be more beneficial on your income taxes for the student to claim themselves, for tax purposes. Meet as a family with your accountant to determine the best course of action before anyone files their income taxes.
Watch Your Income Level
If the college student will be working as well as studying, pay attention to how much they earn. Dependents can generally earn up to $6,350 without having to file or pay taxes. Parents or guardians may also be able to claim nontraditional students over age 25 as dependents, but only if certain income thresholds are not met. If you want more information on planning for filing thresholds, meet with your accountant early in the year.
By knowing how to plan ahead for tax season, you can maximize your family's overall income tax refunds and minimize the impact of paying for school. And then, everyone can focus on the road ahead instead of tax headaches. Contact local accounting services for more information and assistance.Share