College Costs Ahead? Tax Strategies Every Parent Needs to Know

For families with college-bound children, the financial road ahead can feel overwhelming. Tuition, fees, books, and living expenses can add up quickly, leaving many parents searching for ways to ease the burden. The good news is that the U.S. tax code offers several opportunities to save money and plan strategically for these expenses. Whether your student is gearing up for their first semester or you’re navigating ongoing college costs, understanding these tax-savvy moves can make a significant difference in your financial plan.

1. Take Advantage of Education Tax Credits

The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are two valuable tax credits for families with college students.

• AOTC: Offers up to $2,500 per eligible student for qualified education expenses during the first four years of postsecondary education. This includes tuition, fees, and required course materials.

  
  

• LLC: Provides up to $2,000 per tax return, available for a broader range of education levels and courses. You can only claim one of these credits per student, so choose the one that offers the greatest benefit. Keep receipts for all eligible expenses to ensure proper documentation.

  
  

2. Consider 529 Plan Withdrawals Carefully

If you’ve been contributing to a 529 plan, now’s the time to reap the benefits. Withdrawals used for qualified education expenses are tax-free at the federal level (and often at the state level, depending on where you live).  Qualified expenses include tuition, fees, books, and even room and board if the student is enrolled at least half the time. Be cautious to match withdrawals to qualified expenses within the same tax year to avoid penalties.

3. Optimize the Use of Student Loan Interest Deduction

Parents paying off student loans for their college-bound children may qualify for a deduction of up to $2,500 in student loan interest. This deduction applies even if you don’t itemize, making it accessible to many taxpayers. Your income must fall below the set phase-out limits to qualify, so check if you meet the requirements before claiming this deduction.

4. Maximize Employer Education Benefits

If your employer offers tuition assistance as part of your benefits package, you may be eligible to receive up to $5,250 in tax-free education assistance annually. These funds can go toward tuition, fees, and other qualifying expenses without increasing your taxable income. Don’t leave this money on the table if it’s offered!

5. Watch for Kiddie Tax Implications

If your child has income from investments or part-time jobs, it’s essential to understand the "kiddie tax" rules. Unearned income over a certain threshold (adjusted annually) is taxed at the parents’ tax rate rather than the child’s. Planning ahead can help avoid unexpected tax bills.

6. Claim the Tuition and Fees Deduction (If Extended)

Although it expired in 2020, Congress occasionally revives the tuition and fees deduction. This could provide an above-the-line deduction of up to $4,000 for qualified higher education expenses. Stay updated on any legislative changes that may bring this deduction back.

Navigating the intersection of taxes and education expenses can feel complex, but the potential savings are worth the effort. By staying informed and making strategic decisions, you can lessen the financial strain and focus on supporting your child’s academic journey. For personalized guidance on implementing these strategies, reach out to info@mkhstaxgroup.com.