Federal government promotes financial planning for college by offering numerous tax breaks. It consists of tax deductions, tax referrals and tax credits. Most of the tax breaks enforce income limitations and taxes are completely exempted for certain level of income. Federal government offers you an opportunity to evade income taxes on college education investments and you don’t need to pay any taxes on earning or interest if those utilized for educational purpose.
Following are the initiatives taken by federal government to encourage savings while a person is undergoing education -
• American Opportunity Education Credit: It was formerly known as Hope Credit and it is often considered as tax credits for education. A candidate can avail two tax credits in order to compensate the costs of education by getting deduction in income tax.
• Lifetime Learning Credit (LLC): You may use LLC to lessen your taxes by 20 % on the initial payment of $10,000. You can utilize this advantage while paying for tuition fees and other relevant academic expenses for you or your spouse. The eligibility criteria for LLC are subject to some income limitations which may vary periodically. Parents who have more than one child can claim LLC for any one child. For other child, he can avail American Opportunity Education Credit in the similar year.
• Student Loan Interest Deduction: Most of the families discover that their college savings are not adequate to meet the overall cost of their child’s education. If you opted for student loan for your child’s education, then you can get tax deduction on the interest you pay on the loan. The utmost amount of interest deduction you can get on student loan is $2500.
• Coverdell Educational Savings Account: In order to pay your educational expenses, you can utilize Coverdell Educational Savings Account. The savings from this account are tax exempt and earnings from Coverdell ESA are also not taxed, when utilized for educational expenses. The eligibility criteria for Coverdell ESA are limited according to the income level that varies periodically.
It is possible to utilize advantage of tax saving incentives for college education offered by federal government but for that purpose you must understand the complicated process properly. You can confirm with tax professionals before employing your funds for educational purpose in hope of getting tax benefits.