New Education Tax Benefits, Credits You Need to Know

The spring season is approaching, and its crunch time as April 15, Tax Day 2020 is probably closer than you realize. If you’re like many Americans, you like to know the latest tax codes and benefits you can claim on your taxes. As a parent or student in college, there’s one “last minute” tax change, and two tax credits that you need to know about.

Withdraws Now Allowed, College Student Loans

The SECURE Act signed into law in December 2019, AKA the “last minute” tax change, is particularly important for dependents or holders of a 529 college savings plan. At first glance The SECURE Act seems to be primarily geared for those of retirement age. After all, the acronym SECURE is retirement focused; its official name is The Setting Every Community Up For Retirement Enhancement Act of 2019. The common dinner-table question, Does the 529 plan cover room and board? Landed its way into family conversations—And Prior to the SECURE 2019 Act, the answer would have been different. In 2018, 529 college savings plans would not allow withdraws to pay for college student loans, or to deduct tuition and fees. According to a WREN Radio news article, you now have the option to withdraw “up to $10,000 from your 529 plan to pay for student loan interest” and to deduct tuition and fees. With this new tax code enhancement, there are a lot of questions about college savings plans. What is a 529 college saving plan? What are the benefits of investing in a 529 college plan?

529 College Savings Plan

According to SavingforCollege.com, “A 529 plan is a college savings plan that offers tax and financial aid benefits. 529 plans may also be used to save and invest for K-12 tuition in addition to college costs.” There are two types of 529 plan accounts: the 529 college savings plans and the 529 prepaid plans. NerdWallet explains, the most common account is the 529 college savings plan, as the “investments grow tax-free and can be withdrawn tax-free for educational expenses like tuition, room and board, and required textbooks.”

529 Prepaid Plan

With the rising cost of college wouldn’t it be nice to lock in tuition rates before they continue to increase? This is possible with the 529 prepaid plan, the second type of 529. You can lock in an in-state public college cost at the time you pay with the 529 prepaid plan. It’s notable that according to Investopedia, “Unlike savings plans, prepaid tuition plans do not cover room and board.”

State Administered Yet Federally Regulated

A 529 plan has rules specific to the state of investment. You don’t have to invest your funds in your specific state’s 529 plan, but you need to be aware of the rules and regulations of each state’s 529 plan. For instance, can you apply the 529 funds to another state or are their penalties? A big plus of investing in your state’s 529 plan is there are generally state tax deductions you can benefit from. Nerdwallet.com lists out the 529’s available by each state. Understanding that a 529 college savings account is ran and administered at the state level is important. Although—ironically—529’s are a part of the Federal Tax Code, “The money you contribute to a 529 plan isn't tax-deductible for federal income tax purposes,” as referenced in Investopedia’s 529 Plan article, but it can be at the state-tax level. It’s important to note, that while the law was passed in December 2019, as each state administers 529 plans, they do not have to upload the provisions of Section 302 in The SECURE Act—highlighting tax-free withdraws “...up to $10,000...” to pay for student loans. It’s best to check with a tax advisor that’s an expert in your state.

Additional College Tax Advantages

For tax preparation, there are several other educational tax benefits you can deduct or earn as a tax credit when filing your 2019 income taxes. For those currently in college working on obtaining their degree there are two types of tax advantages you should look into below.

The American Opportunity Credit

According to StudentAid.gov, both tax credits are designed to “help offset the costs (tuition, fees, books, supplies, equipment) of college or career school by reducing the amount of your income tax.” In fact, Cnet.com’s 12 of the best tax deductions in 2020 article lists both The American Opportunity Credit and the Lifetime Learning Credit as the top two tax deductions this year. The IRS states, “for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.” There are modified adjusted gross income limits to claiming the AOC, and it’s only available for the first four years of your post-secondary education. You’ll need a Form 1098-T from your school to claim this credit. If you don’t or have not received it, reach out to the school. Be sure to work with a certified tax specialist of visit the IRS Website for details.

Lifetime Learning Credit

In addition to undergraduate level courses, this particular credit helps at the graduate student and professional level as there’s no limit to the number of years you can claim the LLC. The IRS Website states in order to be an LLC eligible student, you must “be enrolled for at least one academic period beginning in the tax year and be enrolled or taking courses at an eligible education institution.” The LLC maximum benefit is $2,000 credit per tax return and is nonrefundable. For those filing married jointly, single or head of household the adjusted gross income limitations are slightly lower than those of the AOTC. The IRS has a helpful LLC and AOTC comparison chart available to help you compare both educational tax credits.

Don’t Forget About Scholarships

While college savings plans are helpful financial resources to have and educational tax credits nice to claim, you can get even more bang for your buck with scholarships. Plus, if you ask us, scholarships are a lot easier to apply for than understanding the latest tax codes! The Fastweb database has more than a million scholarships just waiting for the right student. If you haven’t set up your Fastweb profile you’re missing valuable opportunities—Parents are also encouraged to create a profile. Your profile is an important tool, ensuring you’re directly notified anytime a scholarship exists that fits your profile.