It is expensive to send your children to school, but the tax legislation provides some tax assistance. Here’s a look at five tax benefits for higher education.
1. American Opportunity Tax Credit:
The maximum American Opportunity Tax Credit (AOTC) of $2,500 applies to qualified expenses such as tuition, housing & board, fees, supplies, and equipment. Notably, the AOTC is available for each student in your household, so you may claim a total credit of $5,000 if you have two children in school.
However, the credit is phased off based on modified adjusted gross income (MAGI).
For 2022, the phase-out range for single taxpayers is $80,000 to $90,000 of MAGI and $160,000 to $180,000 for joint filers.
2. Lifetime Learning Credit:
Unlike the AOTC, the credit for eligible costs is limited to $2,000 per year. Furthermore, the Lifetime Learning Credit (LLC) is applied per taxpayer, so your credit remains $2,000 if you have two children in school.
The LLC is presently being phased away in the same manner as the AOTC. The phase-out levels were substantially lower before 2022.
However, you cannot claim both the AOTC and the LLC. The tuition-and-fees deduction is no longer available as an alternative.
3. Forgiveness of student loans:
The president recently announced that up to $10,000 in federal student loans and $20,000 in Pell Grants would be forgiven. Individuals must earn less than $125,000 per year or $250,000 for married couples. There is no tax due on debt forgiveness under current law. Additionally, the president’s proposal extends the year-end payment suspension for federal student loans.
4. Student loan interest deduction:
If your child is paying student loan interest, they may be eligible for modest tax relief. The taxpayer responsible for repaying the debt may deduct up to $2,500 in interest paid during the year. Because this deduction is claimed above the line, it lowers AGI for other tax purposes. However, the deduction for student loan interest is also phased down.
5. Section 529 plans:
Your youngster may not be prepared to start college. In this situation, you could put money aside for the child in a Section 529 plan. The account can grow tax-free, and withdrawals used to pay for qualified expenditures, such as tuition and boarding for full-time students, are tax-free. Furthermore, it’s tax-free for you to transfer unused cash from an older child’s account to a younger child’s account.
The tax laws are very complex. Our short blog articles cannot cover in full all the nuances of the rules. Your specific facts may hold various opportunities and possible risks that only trained, experienced, and highly qualified tax specialists can spot. We encourage you to find such help, rather than trying to figure it all out on your own. Consider giving this marketplace a try by posting your project and signing up here.
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