Tax Tips for Parents with Kids in College this Fall

College costs can add up quickly, but families may have tax-advantaged options to help manage the expense. From education credits to 529 plans, understanding the available tax breaks can help you make smarter decisions.

1. Claim Available Education Credits

You may qualify for the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC).

• AOTC: Provides up to $2,500 per eligible student for the first four years of postsecondary education.

• LLC: Provides up to $2,000 per tax return for qualifying undergraduate, graduate, or continuing education expenses.

Income limits and other eligibility requirements apply, and you can’t claim both credits for the same student during the same tax year.

2. Use 529 Plans and Education Savings Accounts

Withdrawals from a 529 plan or Coverdell Education Savings Account (ESA) can be tax-free when used for qualified education expenses, including tuition, fees, books, supplies, and certain room-and-board costs.

You can’t use the same expenses to claim an education credit and receive a tax-free distribution from an education savings account.

3. Think Carefully Before Using Retirement Funds

You may be able to withdraw money from an IRA or certain employer retirement plans to help pay qualified education expenses.

However, taxes will still apply, and using retirement savings can reduce the money available for your future. Consider the long-term impact before tapping retirement accounts to fund college.

4. Understand the Tax Treatment of Scholarships

Scholarships are generally tax-free when they meet certain requirements and are used for qualified expenses such as tuition, fees, books, and supplies.

However, tax-free scholarship amounts can reduce the expenses you’re able to use when calculating education tax credits.

5. Consider Direct Tuition Payments from Grandparents

If grandparents or other family members want to help with college costs, having them pay tuition directly to the educational institution can provide a tax advantage. Direct tuition payments generally aren’t treated as taxable gifts, regardless of the amount.

It’s important to keep in mind, this special treatment applies to tuition paid directly to the school – not room and board, books, or other expenses.

Plan for Education Costs

Education expenses involve more than simply finding the money to pay tuition. The right combination of tax credits, education savings, and family contributions can help reduce the overall financial impact.

Contact us to discuss your family's education expenses and identify tax planning opportunities that may apply to your situation.