Labor Day is just around the corner, signaling the unofficial end of summer and the traditional start of the academic year. At colleges and universities around California, students are moving into apartments and dormitories, purchasing supplies at the bookstore and preparing for the first day of classes, if they haven’t already begun.
While college is certainly a time to think optimistically about the future, the high price tag of a post-secondary education brings a sobering dose of present reality. Students and their parents can get some tax breaks from the Internal Revenue Service, however, as they seek to save for and pay off the cost of a college education. Just a few of the breaks are mentioned below.
For parents looking to save, there are a couple of options:
• A Coverdell savings account permits a parent to set aside a limited–only $2,000–amount of money each year for each person’s future education. Money saved in a Coverdell account does not have to be used exclusively for college, however. It can be used to fund private secondary school as well. In addition, the interest accrued in a Coverdell is not taxed as long as the money is eventually put to use for a statutorily approved purpose.
• A 529 plan offers increased contribution limits. These plans are administered by the states, so the limits vary, but in some cases people can contribute up to $350,000 for each person over the length of the plan. Like a Coverdell account, interest is not taxed if the money is put towards education. Unlike Coverdells, however, the money in a 529 plan must fund college education exclusively.
The Tax Code offers some helpful breaks for repayment as well. Graduates can deduct a portion of their paid student loan interest up to $2,500 per year. The deduction diminishes as one’s income increases, however, and is not available to single people who have more than $75,000 in adjusted gross income.
The rules surrounding when someone can claim a deduction or credit can be complex. The Tax Code does not make things simple on taxpayers, and errors can occur. In some cases, the IRS may decide to initiate an audit.
Source: CBS Money Watch, “College tax 101: 4 breaks for students,” Kathy Kristof, Aug. 29, 2012
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