Education is a basic structure for a bright future, but it can also become a source of financial stress. Luckily, the government offers saving plans and tax credits that can help relieve some of that burden.
There are some federal and state-sponsored options when it comes to saving for education expenses, including Section 529 Savings Plans and the Coverdell Education Savings Account. While contributions to education plans are not federally deductible, distributions from these accounts can be tax-free.
Some Section 529 plans offer a Prepaid Tuition Option, which allows parents to lock in future tuition costs at the current rate. Most of these plans are only open to residents of the state that sponsors them, and of the 18 plans that exist, only 11—including the Pennsylvania 529 Guaranteed Savings Plan—are currently accepting new applications.
You may also consider United States Savings Bonds. When a savings bond is purchased and used to pay for higher education costs, the interest earned on these bonds is not taxable. Savings bonds are considered one of the safest possible investments and make great gifts for your children, grandchildren, nieces and nephews, to help defray the cost of their education.
Exclusions and Deductions
Next, there are exclusions and deductions of income available for students whose loans are racking up. A student who works for a company that has an employer-provided education assistance program can exclude up to $5,250 a year as a tax-free benefit. Another type of assistance your employer may provide is a student loan repayment. You must work in a qualified profession for these payments to be excluded from your income, so if you’re looking to further your education or get a handle on your existing debt, check with your employer to see if they offer this benefit.
Parents who are going back to school may also qualify for a tax credit. Available tax credits include the American Opportunity Tax Credit and the Lifetime Learning Credit, which allow students to receive tax credit based on tuition and education expenses. You may also consider scholarships, Pell Grants, and borrowing from retirement accounts—which can be done without penalty for higher education expenses in some cases.
Education planning can be confusing and cumbersome but can be well worth your time and effort. As with retirement planning, the sooner you begin education planning the better. If you have any questions, we would be happy to help.
Ryder & Company is located in West Lawn, PA and offers a variety of accounting services, part-time CFO services, payroll preparation, and much more! We also offer tax preparation for individuals, as well as businesses and nonprofit entities. We assist many individuals and businesses in and around Wyomissing, Exeter, and Reading.