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Those with a 529 college savings plan may finally have the chance to tap those tax-deferred funds. However, to avoid levies, they must use it for so-called qualified education expenses — such as tuition, fees, books, room and board, computers and more.
Families should start by adding up qualified expenses and subtracting tax-free education assistance, said Jim Shagawat, CFP and partner advisor at AdvicePeriod in Paramus, New Jersey.
For example, let’s say a student has $20,000 in qualified expenses. They may receive a scholarship for $2,000 and employer assistance for $3,000, leaving $15,000 to pay.
But before forking over the $15,000, families should see if they qualify for the American Opportunity Tax Credit or the Lifetime Learning Credit, both subject to income limits.
Here’s why: Families may use 529 money and still receive a tax credit, but not for the same expenses.
“The IRS considers that double-dipping,” said Shagawat.
The bigger write-off, the American Opportunity Tax Credit, is 100% of the first $2,000 and 25% of the next $2,000 per student. To claim the full $2,500 credit, families may pay $4,000 of expenses out of pocket and use the 529 for costs above that, he said. Families may receive the credit up to four tax years per student.
“That’s the best way to make sure you’re getting the most from these 529 distributions,” Shagawat added.
While the American Opportunity Tax Credit only…
