Family Finances: Use Tax Breaks to Lower College Costs

Family Finances: Use Tax Breaks to Lower College Costs
Tribune News Service
By Sandra Block From Kiplinger’s Personal Finance

It’s often said that buying a house is the largest investment most of us will ever make. But if you have a couple of children, the cost of sending them to a four-year college could exceed even that big-ticket item. Three kids—or at least one with Ivy League aspirations? That’s a house and a vacation home.

The average annual cost of tuition, room, and board for a four-year in-state public college in 2021 was $22,690 a year, while the average annual cost of a four-year private school was $51,690, according to the College Board. But for Ivy League and many selective private colleges, the annual cost is more than $75,000.

Fortunately, the tax code includes a lot of credits and deductions designed to lower the cost of college. Here are some of them:
  • 529 plans
The most effective way to save for college is to start contributing to a 529 college-savings plan while your child is still in diapers. Contributions aren’t deductible on your federal tax return, but the money grows tax-free, and withdrawals are tax-free as long as the money is used for qualified expenses, which include tuition, room and board, books, computers and internet access.

If your child receives a scholarship and doesn’t need the money, you can change the beneficiary to another eligible child or family member.

Some states allow you to deduct a portion of your contributions from your state taxes, usually as long as you invest in your own state’s plan (for a rundown, go to www.saving If you don’t use the money for college, the earnings portion of your account will be subject to income taxes and a 10 percent penalty.
  • Direct payments
Grandparents (or other well-off relatives) can also reduce the size of their estates by contributing directly to your child’s school. Those payments are exempt from gift taxes as long as they’re made directly to the child’s college to cover the cost of tuition. Some grandparents may prefer this option over a 529 plan because it allows them to maintain control of their money until the child attends school. However, these payments may reduce the child’s eligibility for financial aid.
  • Savings bonds
Under certain conditions, interest from EE or I savings bonds is tax-free if the money is used to pay for college tuition and fees for yourself, your spouse or a dependent. You may also qualify for the tax exclusion if you redeem the savings bonds and deposit the money in a 529 plan within 60 days.

To qualify for this tax break, the savings bonds must be issued in your name, not your child’s. The original owner must also be at least 24 years old on the bond’s issue date. There are also income limits on this tax break: For 2022, the exclusion phases out if your modified adjusted gross income is between $85,800 and $100,800 for single filers and between $128,650 and $158,650 for joint filers. These thresholds are adjusted annually for inflation.

(Sandra Block is a senior editor at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit

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