Five Common College Tax Credits and Deductions

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Five Common College Tax Credits and Deductions
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Putting money aside for college is one of the wisest financial investments that a person can make.

Putting money aside for college is one of the wisest financial investments that a person can make. The earlier a college savings account begins, the better the return. Putting money into these accounts is beneficial up to the time the student enters college. Beginning to withdraw funds may hurt the power of interest bearing accounts, but it does not mean that the savings are over. There are tons of tax breaks for college and post-secondary education expenses.

529 Plans

These are state and university sponsored college savings plans. Each plan is different but they are all available to anyone, regardless of the state of residence. Usually the state sponsoring the plan offers a benefit specific to that state. For example, Georgia's 529 plan allows for up to $2,500 in contributions to be deducted from state income taxes each year. At a federal level, all 529 plans are tax-free on distribution if the money is used for writing essays online and qualifying educational purposes. These plans can usually be invested in at the same time as a student is attending college, although they are most powerful when started early.

American Opportunity Credit

The American Opportunity Credit (AOC) was modified under the American Recovery and Reinvestment Act. It was originally a modification of the Hope Credit, which applies up to the 2008 tax year. The AOC provides a maximum of $2,500 to eligible students, and it can be taken four times. The qualifying expenses include tuition, room and board, and course materials, to name a few. There are income limits to this credit. It is available to individuals making less than $80,000 and married couples making less than $160,000.

Lifetime Learning Credit

Unlike the AOC, this credit can be claimed indefinitely, so long as the three primary criteria are met. This makes it useful for graduate students and those taking longer to earn their undergraduate degree. This credit allows for a maximum of $2,000 each year. In order to qualify, you must pay qualified education expenses, pay the education expenses for an eligible student, and the eligible student must be you, your spouse, or dependent. The Lifetime Learning Credit and the AOC may not be taken in the same year.

Student Loan Interest Deduction

This deduction can be taken during school and after. It is considered a deduction to income. This means that it does not require an itemization. Each year it allows for a maximum deduction of $2,500. It only applies to the interest paid on loans, not the principal or fees.

Qualified Work-Related Education

This is a business deduction for any of the costs associated with work-related education. In order for something to be considered, it must pass at least one of the following two tests. First, the education must be required by law or present employer to maintain a job, position, or salary. Or, it improves or maintains skills needed for a current position. Simply passing one, or both, of these tests is not a guarantee to the deduction. There are two qualifiers that must be examined. The first is if it is needed to meet minimum education requirements for a position. The second is if the education will qualify the individual for a new trade.

These five tax breaks are some of the most commonly used. There are, however, many more that are less common and specific. The IRS posts a list of all available tax incentives, credits, and deductions that relate to education on their website. Some of the items listed are no longer valid but they remain on the site for people still filing back taxes or undergoing audits and investigations.