On this Tax Tip Tuesday, we’ll talk about some benefits you can get when you’ve got kids at college and possibly if you are returning to college.
There are other neat things you can do to pay for college in a tax-advantaged way. So let’s start with the credits. I mentioned this in my previous video about tax credits. Still, the two big ones we’re looking at for college are the American Opportunity Tax Credit and the Lifetime Learning Credit. So if you’ve got a dependent, and for the first time going to college, you can take advantage of the American Opportunity Credit.
And no, it’s not going to cover everything. College is very expensive, but hey, it helps. Right? So the American Opportunity Credit is based on 100% of the first $2,000 qualifying college expenses and 25% of the next $2,000. So the possible credit is $2,500 per student. The thing that’s you got to worry about here is that there is a phase-out, and I’ve talked about the phase-out before. So that means that when your income hits a certain level, you start losing some of the credit, which I know stinks, but that’s how the government designs these credits. So if you don’t like it, write to your congressperson. And you can claim it per student, so say you have quintuplets, I don’t know. And they all go to college at the same time. Well, you can get that credit for every one of them while they’re in college.
Now, the neat thing about this credit is that up to 40% of it is refundable. What does that mean? If the credit causes you to owe so little in taxes that you would be getting a refund, you can have it do that for up to 40% up the credit. So that’s fantastic. Now, the other credit, the Lifetime Learning Credit, this one is generally used after you’ve used up the American Opportunity Credit. So it’s up to $2,000 per return, based on 20% of up to $10,000 of qualifying higher education expenses, which anyone who’s got kids in college, I’m sure you have seen $10,000 happens quickly. So it’s not a huge amount again, but better than nothing, and there is an income limit for this one, unfortunately. Now, the thing to understand with these two credits is that you can’t claim them both at the same time in the same year for the same student.
So you do one than the other. Generally undergrad for the first time, American Opportunity Credit. It’s a bit more. And then after that first four years, anything else you do after that, Lifetime Learning Credit. Now, if you’re looking at some older years of tax returns, or maybe it’s not the first time you have one of your kids in college, you might remember there was a tuition and fees deduction.
Now, there is something you might want to think about if your kids are a little bit younger or maybe if you have grandkids that are a little bit younger. You can gift money into what we call a 529 college savings plan. When that child takes the money out of that 529 plan, it’s tax-free. So the money can grow there. You take out the money and pay for college. It’s fantastic. You can also use savings bonds interest; savings bonds issued after 1989 can be tax-free if you use the bond to pay for qualified college tuition and fees. So there are a couple of ways to help shift money around to pay for college and help with taxes. So college is still expensive, but there are few breaks.