Take Advantage of These Tax Tips to Pay for College

Usually when you hear “distribution planning” you think of retirement. However, the tax planning that is included in retirement planning can be applied to other large expenses; namely, college fees. Education funding is difficult for a variety of reasons, and as CNBC explains , families must have a “distribution plan” when using assets to pay for education. After all, college education has become one of the biggest expenses a family can take on, so you need to do your research and take advantage of all the possible tax breaks. Let’s take a look at how this payment strategy can provide significant tax savings for families going to college.

Tax Tips to Help Pay for College Tuition

One of the most important ways to save on taxes for families with college-going kids is to take advantage of college tax credits. For example, the American Opportunity Tax Credit offers up to $2,500 per undergraduate student for up to four years. For advanced degrees and professional degrees , Lifelong Learning Loan offers up to $2,000 per eligible student per year.

Note. You cannot “double” your tax credits by using one of these loans and withdrawing money from a 529 college savings plan . This is where planning comes in, because in order to qualify for the full cost of the tax credit, you must be prepared to cover a portion of the tuition fees through your income or credits.

Speaking of loans: in addition to loans, tax deductions must also be taken into account. For those who take loans , there is a student loan interest deduction of up to $2,500. This exemption applies to all loans (not just federal student loans) used to pay for higher education expenses. In addition, student loans may qualify you for the US tax credit listed above.

Many families use 529 withdrawals by default as the best known way to obtain tax-free withdrawals for eligible education expenses. But when it comes to distribution planning, it’s worth comparing different payment options. While student loans are a daunting prospect, they may be the best strategy for you to get the most out of tax credits and deductions, and even write off tax-free loans (for some future non-profits and government employees).

Ultimately, making the most of tax breaks while trying to send your kids to college is no easy task. It’s important to be honest about your own limitations when it comes to making these kinds of financial decisions. Consider enlisting the help of a financial advisor—someone who won’t rip you off .