CHICAGO—All that tuition you pay has one silver lining: tax breaks.
If You Have Young Kids
Federal tax law changes this year let families use up to $10,000 per year from a 529 college savings plan to pay private school tuition. But beware: Not all states mimic the new federal rules, and you could be hit with state tax penalties or have to pay back past state deductions or credits. Check your state (https://bit.ly/2O5Coar).If your state does copy the new federal law and rewards 529 contributions annually, there might be a new tax opportunity. People can spend some 529 savings for K-12 tuition each year and then replace the sum with new contributions, said Boca Raton, Florida, financial planner Sean Moore.
Each year that you make a new contribution you may get a state deduction or credit, Moore said.
If You Have Kids in College
The American Opportunity Credit is worth as much as $2,500 per student each year—but only if you have spent enough.You get 100 percent of the first $2,000 tuition and fees you pay a year; then 25 percent of the next $2,000. If you are under that amount, see if you can pay upcoming bills before 2018 ends.
For the full credit, your individual adjusted income—what is left after deductions like retirement savings and alimony—cannot exceed $80,000 and couples $160,000. Partial credit is possible up to $90,000 for singles and $180,000 for couples.
If you are close to the cutoff, saving more for retirement in the next few weeks could bring your income down by thousands of dollars, said Andy Phillips, director of The Tax Institute at H&R Block.
If you are not contributing the maximum amount to your retirement accounts, start there. Then go to health savings accounts (HSAs) or business plans such as SEP IRAs. Not everyone can live with less in their paychecks, but Moore said: “It could be worth living frugally and pulling money from a savings account if available. You get $2,500 of free money.”
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