I pay a lot for college – can I save on taxes? | submitted by Gretchen Kaseman
As the cost of higher education continues to grow, the good news is you may be able to save a significant amount of income tax. There are many potential tax savings that are related to higher education. Here are a few:
Planning ahead: A qualified tuition program (also known as a 529 plan) allows you to make contributions to an account set up to meet a child’s future higher education expenses. The contributions are not deductible for federal income tax purposes, but the earnings on an account accumulate tax-free and distributions are tax-free if spent on qualified education expenses. Wisconsin allows a deduction for contributions to a qualified state tuition program of up to $3,000 per child for the child’s parents, grandparents, great-grandparents, and aunts and uncles.
While attending: A tax credit is dollar-for-dollar tax savings and provides much more benefit compared to a deduction. Tuition credits are available for qualified tuition and related expenses for you, your spouse, or a dependent if claimed on your tax return, however, there are phase-outs for higher-income taxpayers. If the student receives a scholarship, it reduces the amount of expenses that may be taken into account in computing a credit or deduction.
The American Opportunity tax credit is up to $2,500 per student for the first four years of college. The credit is also 40% refundable, which means that you can get a refund if the amount of the credit is greater than your tax liability.
After the first four years, you can take a Lifetime Learning credit of up to $2,000 per family for every additional year of college or graduate school. If you don’t qualify for one of the tax credits, you may be able to use the Tuition and Fees deduction.
After attending: Interest on loans used to pay for education at a post-secondary school is deductible up to $2,500. However, for 2011, if your adjusted gross income is over $120,000 (married filing jointly) or $60,000 (single filers), the deduction will be partly or fully phased out.
Other tax savings options are available, and not all of the above ideas can be used in the same year. Also, some may reduce the benefits of others, so it takes careful thought given an individual’s particular situation to determine which provides the most benefit.
Gretchen Kaseman, CPA, is a manager at Wegner CPAs and Consultants, Madison.
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