Tax-Free Breaks for College Education | USTaxAid

Diane Kennedy's Blog

Tax-Free Breaks for College Education

Written by Diane Kennedy, CPA on October 24, 2021

One of the best tax breaks available for college occurs when you have a business. If you’re new to US TaxAid blogs, let me fill you in on something.

I almost always recommend that you have a business. It can be a side business, a part time business, a ramped-up hobby, just as long as you have a legitimate business. If you’re not sure if you have a business that the IRS will recognize as a business, start here.

What does it take for the IRS to recognize your business?

If you have a business, employ your kids in work they legitimately do for the business. There are a lot of tax breaks if you do that, including the ability to set up education plans and pay off student debt, all with great tax breaks.

But let’s talk about other tax breaks you can get with or without a business. 

Two Tax Breaks for Education

There are two primary tax breaks that just about anyone can take for higher education. These are the 529 plans and American Opportunity Tax Credit.

A 529 savings plan works much like a Roth  pension plan. Your investment grows on a tax-deferred basis and can be withdrawn tax-free if the money is used to pay for qualified higher education expenses. Contributions are not deductible from federal income taxes. 

Eligible 529 college expenses include room and board (when the university is attended at least half-time), tuition, books, supplies, fees, computers and internet.

The American Opportunity Tax Credit is a tax credit of up to $2,500 per student for each of the first 4 years of college. It does phase out as your income goes over $160K ($80K if you’re single). The student must be in school at least half-time. Eligible expense include tuition, books and fees, but not room and board.

You can use both a 529 plan and the American Opportunity Tax Credit, but you can’t use both credits for the same expenses. So the 529 Plan can be used for some of the expenses and some different ones for American Opportunity Tax Credit. But you can’t use the same expenses for both.

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