Education Tax Credits and Using 529 Funds

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Education Tax Credits and Using 529 Funds

If you have your child’s college saved or partially saved for in a 529 plan, that’s fabulous.   One strategy that you should keep in mind is how to make the most of the American Opportunity Credit for undergraduate students.  When you use 529 funds to pay tuition, you cannot then use those same education expenses to claim the $2,500 American Opportunity Education Credit or, any other education credits, for that matter.  That would be considered double dipping since you got tax deferred earnings in your 529 plan (so long as you use the funds for qualified education expenses), you cannot then also get a tax credit for the expenses you paid for with 529 funds…

Therefore to make the most of the education credits available to you, you should plan on being out-of-pocket for enough of the education expenses to get the credits available to you.  In my case, I have a freshman in college with enough in her 529 plan to handle the undergraduate degree.  I will, however, be paying $4,000 of her annual education expenses with personal funds that are not coming out of her 529 plan.  With that $4,000 out-of-pocket expense, I will get a $2,500 tax credit.  So saving $2,500 on $4,000 of expenses is well worth it, a 63% return on my money.  While I love the 529 plan…it never gave me a 63% return on my investment.

Those of you getting to make that 2015 tuition payment, consider using non-529 funds in order to make the use of education credits that are an incredible return on your money.  Check with your CPA to make sure you are eligible for education credits.  They phase out with incomes of $80,000 to $90,000 for single taxpayers and $160,000 to $180,000 for those who file married.

IRS Information on Education Credits

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