With Inflation Driving College Costs Soaring, These Tax Tips Can Help

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As inflation causes the cost of a college education to rise, many parents may worry about rising tuition fees.

A few tax breaks, however, can offer relief to cash-strapped families, according to financial experts.

While tuition and fees have remained mostly unchanged during the pandemic, some colleges are now raising tuition fees by up to 5% amid soaring inflation and other pressures.

Additionally, 529 college savings plans could have lower balances after double-digit stock market losses in 2022, and rising interest rates are making student loans more expensive.

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While 529 college savings plans offer a tax incentive to save and the student loan interest deduction may help after graduation, other write-offs may be limited.

“There just isn’t much there,” said certified financial planner John Loyd, owner of The Wealth Planner in Fort Worth, Texas.

However, there are a few tax credits worth exploring.

1. Tax credit for undergraduate students

If there is an undergraduate student in the family, you will want to consider the US Opportunity Tax Credita break for eligible study expenses, limited to four years per student.

Here’s how it works: you can claim 100% of the first $2,000 of costs per student and 25% of the next $2,000 for a maximum credit of $2,500 per student. To qualify, you will need Form 1098-T of the school, covering tuition fees and expenses paid.

Plus, up to $1,000 is refundable, meaning you can claim some of the benefit even without being taxed, a possible boost for low-income earners, Tommy Lucas said, CFP and Enrolled Agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

However, the more you earn, the harder it can be to qualify. For 2022, eligibility begins to disappear once your modified adjusted gross income exceeds $80,000 ($160,000 for couples filing together). You cannot claim expungement with MAGI above $90,000 ($180,000 for joint filers).

While 529 college savings plans offer a tax incentive to save and the student loan interest deduction may help after graduation, other write-offs may be limited.

2. Graduate and Professional Degree Tax Credit

Another tax relief, the lifetime learning creditextends to higher education and professional courses, worth up to $2,000 per tax return.

You can claim 20% of the first $10,000 of eligible education expenses. Although the credit is non-refundable, you can take it for an unlimited number of years. But the same revenue cuts apply.

You can’t claim both credits for the same expenses, so if you’re eligible for the U.S. tax credit, it’s best to take that one, Loyd explained. “That’s where you’ll get the most bang for your buck.”

3. Claim tax relief to work

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Parents can claim the US Opportunity Tax Credit or the Lifetime Learning Credit while the children are dependent, but working students may also qualify for some tax breaks.

Students can claim the earned income tax credit, a refundable deduction for low to middle income workers.

If they can afford to save some of their income, they can also qualify for the Retirement Savings Contribution Credit, Lucas said, applying up to 50% of deposits to a maximum of $1,000. for individual investors.

“Essentially you get 50 cents on every dollar for free for every dollar you put into a Roth [individual retirement account],” he added.

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