The summer season is quickly coming to an end, and for many students that means it's time to get back into the school routine. To make this transition easier on your wallet, here are some of the best tax breaks you can take advantage of as a student in 2021.
1) Higher Education Credits: There are two higher education credits on the books. Generally, you can claim one or the other, but not both.
The AOTC is usually preferable, especially with families with more than one child in school.
2) Section 529 Plans: If you can manage to set aside money ahead of time, consider setting up a Section 529 plan for your young child. These tax-favored plans are operated by the individual states and typically have generous six-figure contribution limits. Funds accumulate inside an account without any tax erosion until it is used to pay qualified expenses when they attend college - distributions from these accounts will be exempt from taxes if they're used on qualified expenses like tuition or room and board at most colleges in America.
Under the Tax Cuts and Jobs Act (TCJA), a Section 529 plan may also be used to pay up to $10,000 in tuition at an elementary or secondary school.
3) Coverdell Education Savings Account: A Coverdell Education Savings Account (CESA) is a great way to save for your future. You can contribute up to $2,000 each year and any earnings are tax exempt. Any distributions used for qualified expenses like tuition or room-and-board will not be taxed either!
The ability to contribute money for college is phased out at relatively high levels, but this option remains available until a child graduates from their senior year in high school. Consider it as a supplement to other strategies when saving up for higher education.
4) Scholarships: Scholarships are a great way to help your child get the education they deserve or pursue their dreams. Scholarships often come with tax benefits too, so make sure you know all of the ins and outs before accepting
One thing that many people aren't aware of is how scholarships can be taxed as income if it's not used for tuition-related expenses like books, room-and-board, etc. Make sure you're careful when using scholarship money!
Contact your professional tax advisor for more tax lessons about tax benefits for higher education.