Your little baby has grown up fast. Now that college is just around the corner, find out how you can soften the blow of educational expenses come tax season.
The cost of post-secondary education is climbing at a record rate. Over the past six years, the average cost of a four-year, private college education has risen from just more than $27,0001 to roughly $42,000, a whopping 154% increase.2
There is a silver lining to the cloud of educational costs, however. The high price tag of higher education could be partially offset by tax breaks - if you know where to look.
- Tuition and Fees Deduction - Students or their parents (if student is claimed as a dependent) may be able to file for this $4,000 credit paid toward tuition and fees using IRS Form 8917 as part of an annual tax return. Eligibility for this tax break depends on meeting all of the qualifications, including having a modified adjusted gross income (MAGI) that does not exceed $65,000 ($130,000 for joint filers). Those whose income sits between $65,001 and $80,000 (or $130,001 and $160,000 for joint filers) might still be eligible for a nice slice of the pie—$2,000, to be exact.3 Ask your tax professional and visit IRS.gov for details.
- Student loan interest deduction - Personal loan interest isn’t typically tax deductible, except in the case of mortgages and student loans. If your MAGI is less than $75,000 ($150,000 for joint filers), you may be able to reduce your taxable income for a tax break of as much as $2,500.4 Seek guidance from your tax professional and download IRS Publication 970 (page 30) for details.
- Coverdell education savings accounts (CESAs) - Although contributions to a CESA are not tax deductible, they can grow tax-free until withdrawn to pay toward your child’s qualifying college, secondary or elementary educational expenses. You can contribute as much as $2,000 per year for qualifying tuition, tutoring, books, supplies and fee costs into this tax-exempt savings account, and you may be eligible to roll over any leftovers to another qualifying family member’s CESA tax-free.5 Seek guidance from your tax professional and download IRS Publication 970 (page 30) for details.
To learn more about saving for qualifying educational expenses through a Coverdell account at First Tennessee, visit our Investing section.
(http://www.stratagee.com/resources/efc_quick_reference/1213_efc_quick_reference.html), May 2012
(http://www.irs.gov/newsroom/article/0,,id=213044,00.html), May 2012
(http://www.smartmoney.com/borrow/student-loans/the-college-tax-breaks-explained-9644/), May 2012