School can be expensive, and if you have kids or are planning on having kids you probably want to start planning for their educations as soon as possible. However planning for future education expenses can be massively complicated and you should talk with an accountant about it. Here are some of the factors involved:
There are multiple education tax credits, including the American Opportunity Tax Credit and the Lifetime Learning Credit. The first, the American Opportunity Tax Credit, can reduce your yearly income tax bill by up to $2,500 per student for all four years, and up to 40% is even refundable. The second is a one-time $2,000 tax credit and doesn’t depend on the number of students in your family. Limits apply to both of those, depending on your income.
There are education savings accounts too, which allow you to set aside money ahead of time for your children’s educations. Usually you can set aside up to $2,000 per year per kid in a tax-deferred account. That money can then be used for elementary and secondary education in addition to college expenses, and can be used for either private or public universities.
Section 529 plans are another option, and they include tax-favored college savings plans and prepaid tuition accounts. They can be used to pay for tuition, fees, supplies, equipment, and certain room and board expenses—tax free!
After they’ve started college, there’s the student loan interest deduction, which is an above-the-line deduction of up to $2,500 a year for interest paid on student loans. The deduction will phase out depending on your income.
Remember to keep good records of all education related expenses since this area is both expensive and complicated. Well, that and because your accountants will greatly appreciate it.