Many people that are pursuing higher education are unaware of the various tax breaks that are available to them while they are pursing their education. There are a number of tax breaks offered by federal and state governments to provide incentives for students and their families to invest in higher education. Here are a few of the tax breaks that those pursuing higher education can expect to receive.
529 College Savings Plans
529 college savings plans provide parents with a way to save for their child’s college education tax free. The accounts allow the money to grow over the years based on the value of the underlying investments without being taxed. Any withdrawals from the accounts are also tax free as long as the funds are used for a qualified higher education expense as specified in the terms of the plan. If the funds withdrawn are used for something other than a qualified expense, the money taken from the account will be subject to a 10% penalty tax and any applicable federal and state taxes.
Tuition Tax Deduction
When calculating your personal income tax for the tax year, you may be able to deduct your tuition expenses from your personal income, effectively lowering your tax burden by a considerable amount. It is important to keep records and receipts of the amount of tuition paid and when the amount was paid so that you have the information readily available when it is time to calculate your taxes. Any person that has paid tuition for higher education qualifies for this tax credit regardless of the number of hours they are currently enrolled in the school.
Student Loan Interest Deduction
People that have taken out student loans to pay for their higher education may also qualify for an additional deduction on their income taxes based on the amount of money they have spent paying interest on their student loans. The deduction amount can be as high as $2,500 per year, but the percentage of the amount of interest that can be deducted decreases as the amount of income you earn rises. In many cases, the interest deduction is only valid for the first five years that you are paying on the loan. However, it is important to know that no education-related tax deductions or credits are allowed for taxpayers who are married but filing separately, so if you are married, you will have to file jointly to take advantage of the tax credits.
Join our newsletter
Subscribe to get the latest "Engineer Your Finances" content via email.