Inflation just reached a 40-year high, and money is tight. With the new school approaching, here are four tips to help prepare your student for savings and success.
Tax credits can help reduce your taxes.
Two education-related tax credits can help reduce your tax liability: the American Opportunity Credit (AOTC) and the Lifetime Learning Credit (LLC). Tax credits reduce the amount of taxes owed.
The AOTC provides students, or their parents, with a tax credit of $2,500 each year during their first four years of college. If you don’t have any tax liability before the credit, you will receive a $2,500 refund. If only some of the credit is used to reduce your tax liability to zero, you will receive $1,000. That means if you only need $500 to take your tax liability to zero, you’d still receive a $1,000 refund.
There are nuances to this credit, and not everyone is eligible. Students must be enrolled at least part-time, and their parents can make no more than $90,000 for single-filers and $180,000 for those married and filing jointly.
Students who have used up their four years of AOTC credits may be eligible for the LLC, which does not have an expiration date. This credit can be used for graduate school courses and courses that do not count toward a degree but are to advance your career further. Like the AOTC, there are income limits ($69,000 for single-filers and $138,000 for joint filers).
Unlike the AOTC, the LLC is a nonrefundable credit, meaning that you won’t receive this money as a refund if you reduce your liability to zero. This could, however, put you in a lower tax bracket, reducing the amount you owe in taxes.
Students can deduct up to $2,500 of student loan interest each year. A deduction lowers the amount of money being taxed. For example, if you pay $1,000 in student loan interest at 22%, you will save $220 in taxes. You do not need to itemize your tax return to get this benefit, but you cannot claim the benefit if you make more than $85,000 for single filers and $175,000 for joint filers.
529 Savings Plans are a great way to save for college
You can fund a 529 plan for your loved ones for education expenses. The money you put into the account is already taxed, meaning it’s money you earned and paid taxes on. Each year you can contribute up to $16,000 per child. As the money grows, it is free from federal income tax, and many states offer tax-free withdrawals. The funds in these plans can help pay for apprenticeship programs and student loans up to $10,000.
If your student has earned income, they can contribute to a Roth IRA. An adult must open an account on behalf of a minor, and there are limits to how much they can contribute. As a parent, if your child opens a Roth IRA you can help fund it so long as it doesn’t exceed the amount they earned. For example, if your child makes $4,000 per year, you can’t contribute more than $4,000.
Additionally, Roth IRAs are a great way to ensure tax-free retirement funds into the future, because they’re taxed at today’s tax rates instead of the rates when you withdraw. According to OfficialData.org, if you invested $10,000 in the S&P in 2001, by 2021, you would have five times that much: $50,913,05!
*Keep in mind that tax laws are complex. This is not an exhaustive list of all student-related tax credits, regulations, and rules. For more information on each area covered, click on the respective hyperlinks. Our team is here to help answer questions specific to your situation*