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9/8/2015

Reducing Tax Liability When Paying for College

Paying for college is one of the largest expenses your clients will face in their life. In an ideal world, all of that money would go towards pursuing an education. But even money saved for educational expenses isn’t tax free. There are a number of ways your clients can reduce their tax liability when it comes to paying for their own or their child’s education.

*Lifetime Learning Credit (LLC)

With the Lifetime Learning Credit, clients can claim up to $2,000 for qualified education expenses. There also is no limit on how many years your clients can claim this credit per student, making this ideal for families with multiple children in school at the same time.

*American Opportunity Credit (AOTC)

The American Opportunity Credit can only be claimed for the same student for four years, but any year students claimed the Hope Scholarship counts towards these four years. In other words, students can’t accept the Hope Scholarship and claim the AOC. But remember, the amount your clients would save with the this credit is roughly the same amount offered by the Hope Scholarship.

*Deductions for Tuitions

Depending on their income, clients can also deduct up to $2,000 or $4,000 of qualified tuition and mandatory enrollment fees. In order to qualify for this tax credit, the eligible student must be the person filing or their spouse or dependent. Also, the modified adjusted gross income must be less than $160,000 your client is married and filing jointly.

*Clients may only claim one of these credits per student, per year.

529 Savings Plan

The money your clients put into a 529 Savings Plan is tax deductible, but what they contribute to it is not. But when it comes time to withdraw, that money is tax-free. Your clients can use money from their 529 the same year they use the AOTC and the LLC, as long as it is not for the same expense.

Tax-Free Savings Bonds

If your clients are earning interest on a Series EE or Series I savings bond issued after 1989, the money can be tax-free if used for qualified educational expenses. Like with the 529 savings plan, they cannot use interest from savings bonds on the same expense being claimed by the AOTC or LLC.

State Tax Benefits

Individual states offer other tax benefits that may or may not be combined with the above mentioned benefits. Check with your state’s local governing body to see what the laws are.

Stay up-to-date with the latest changes in tax and accounting with our unlimited webinar package or our unlimited webinar plus package.



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