Sending your child to college is a significant milestone—and a major financial commitment. While tuition, housing, and books are often top of mind, tax planning is an equally important piece of the puzzle that many families overlook.
At Ayanna Financials, we help parents and guardians maximize every available tax benefit, reduce out-of-pocket costs, and incorporate higher education into a broader financial strategy.
Here’s what every parent should know about taxes and college.
1. Education Tax Credits: Don’t Leave Money on the Table
The IRS offers two powerful education tax credits that can directly reduce the taxes you owe:
- American Opportunity Tax Credit (AOTC)
- Up to $2,500 per eligible student for the first four years of college
- 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000
- Refundable up to $1,000—even if you owe no tax
- Lifetime Learning Credit (LLC)
- Up to $2,000 per return, for any year of post-secondary education (no limit on number of years)
- Great for part-time students or graduate school
Tip: These credits phase out at higher income levels, so proper income planning is key to eligibility.
2. 529 Plans: Tax-Advantaged College Savings
If you’re saving for college, a 529 College Savings Plan offers major tax advantages:
- Tax-deferred growth
- Tax-free withdrawals for qualified education expenses
- Potential state tax deductions or credits (varies by state)
These accounts can also be used for:
- Room and board
- Computers and required technology
- Up to $10,000 per year in K-12 tuition (in some states)
And with the SECURE 2.0 Act, unused 529 funds can now be rolled into a Roth IRA for the beneficiary (subject to limits)—making them even more versatile.
3. Claiming a Dependent: Timing and Strategy Matter
If your child is still considered your dependent, you may qualify for education-related tax benefits. However, in certain situations—especially for students working part-time or receiving scholarships—it might make sense for your child to file independently.
Planning Tip: Carefully evaluate whether the parent or student should claim education credits based on income, dependency status, and scholarship coverage.
4. Student Income and Tax Returns
Even if your child is still a dependent, they may need to file their own tax return if they:
- Earn more than $14,600 (standard deduction for dependents in 2024)
- Have unearned income (like investments) over $1,250
- Want to claim a refund on withheld taxes
If your child has a job while in school, ensure their W-4 form is filled out correctly to avoid over- or under-withholding.
5. Scholarships and Grants: Are They Tax-Free?
Scholarships and grants are generally not taxable if used for qualified education expenses (like tuition, required fees, and supplies). However, if used for room and board or incidental expenses, those portions may be taxable.
Proper documentation is key to avoiding surprises come tax time.
6. Education-Related Deductions
In some cases, you may qualify for:
- Student loan interest deduction (up to $2,500 annually)
- Tuition and fees deduction (though this expired, it could be reinstated in future legislation)
7. College and Your Broader Tax Plan
College expenses don’t exist in a vacuum—they intersect with retirement planning, estate planning, and overall tax strategy. Here’s how tax-smart planning can support long-term goals:
- Avoid income spikes that reduce eligibility for financial aid
- Strategically time withdrawals from savings, retirement accounts, or trusts
- Leverage multi-year planning to maximize education credits
- Use gifting strategies to fund college costs without gift tax consequences
How Ayanna Financials Can Help
Tax planning for college isn’t just about filing forms—it’s about creating a strategy that aligns with your family’s finances, goals, and future. We’ll help you:
- Determine which education credits you qualify for
- Analyze whether to claim your student as a dependent
- Optimize 529 plan withdrawals and contributions
- Prepare and file accurate, compliant returns for you and your student
- Plan for student loan repayment with tax implications in mind
Prepare Early. Plan Wisely. Pay Less.
Don’t let the cost of college catch you off guard at tax time. With the right planning, education expenses can be a powerful opportunity to lower your tax liability and protect your financial future.
Schedule a consultation with Ayanna Financials today to develop a personalized college tax strategy for your family.
