As a driver, you’re used to navigating long hauls and managing your time on the road. But when it comes to your finances, especially with a child heading off to college, the journey can seem just as challenging. Proper tax planning can make a significant difference in managing the costs of higher education. This guide will help you understand the tax implications and benefits available to you as a parent of a college student. 

Understanding Education Tax Credits

The U.S. tax code offers several tax credits to help offset the cost of higher education. The two primary credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). 

  • American Opportunity Tax Credit (AOTC): This credit offers up to $2,500 per eligible student for the first four years of higher education. To qualify, your child must be enrolled at least half-time in a program leading to a degree or recognized education credential. 
  • Lifetime Learning Credit (LLC): This credit is worth up to $2,000 per tax return and is available for any post-secondary education and courses to acquire or improve job skills. There is no limit on the number of years you can claim the LLC. 

You can claim an education tax credit if you meet the three requirements set by the IRS:  

  • You, your dependent, or a third party pays for qualified education expenses for higher education.  
  • An eligible student is enrolled at an eligible educational institution 
  • The eligible student is yourself, your spouse, or a dependent you list on your tax return.  

Student Loan Interest Deduction

If you’re paying interest on student loans, you may be eligible to deduct up to $2,500 of interest paid during the year. This deduction can reduce your taxable income, which can lead to significant tax savings. 

Qualified Education Expenses

Certain expenses beyond tuition can also qualify for tax benefits. These include fees, books, supplies, and equipment required for enrollment or attendance. Make sure to keep detailed records and receipts of all education-related expenses. Expenses that do not qualify include room and board, insurance, medical expenses, and transportation.  

529 Plans and Tax Benefits

If you’ve been saving for college through a 529 plan, withdrawals used for qualified education expenses are tax-free. This can include tuition, fees, books, supplies, and even room and board if the student is enrolled at least half-time. Money in a 529 plan grows tax-deferred while in the account. However, contributions to a 529 plan are not tax deductible on your federal return, but over 30 states provide tax deductions or credits for the contributions.  

Impact of Scholarships and Grants

Scholarships and grants can reduce the tuition you need to pay out-of-pocket but also affect your tax situation. Generally, scholarships and grants used for tuition and required fees are tax-free, but amounts used for room and board or other expenses may be taxable. 

Many universities provide their own scholarships qualified students can apply for. There are also external scholarships available, including at the national, state, and local level. Students are encouraged to visit their university’s website to find scholarships or to use national or local scholarship services.  

Dependency Status and Tax Benefits

Determining whether you can claim your college student as a dependent is crucial for tax planning. Generally, if you provide more than half of their support and they are a full-time student under the age of 24, you can claim them as a dependent, which can qualify you for other tax benefits. 

Navigating the tax implications of having a child in college can be complex, but with careful planning, you can maximize your tax benefits and reduce your financial burden.  

If you have any questions, contact our team of Abacus Professionals at 417.380.5000 or transportation@abacuspro.com.