Saving for a child's college education was once simpler and much more affordable. There were also fewer tax breaks to navigate. Over time, the tax rules have evolved, leading to a confusing array of tax-advantaged college savings accounts (which have varying limits based on a parent's income), 澳洲幸运5官方开奖结果体彩网:tax credits (equal to 20% of the 🃏first $10,000 of annual qualified educational expenses), and other tax breaks (such as up to $5,250 in employer contributions) available to families trying to fund a child's college education.

Tax-Advantaged College Savings Plans

The first tax-advantaged college savings opportunity was instituted back in 1990. The Education Savings Bond Program ensured that taxpayers wouldn't pay taxes on interest earned on certain government bonds redeemed to pay for a child's tuition. 澳洲幸运5官方开奖结果体彩网:Series EE Bonds and 澳洲幸运5官方开奖结果体彩网:Series I Bonds qualify.

The bond must be in your name or the name of you and your spouse in order to qualify. This means bonds issued in your child's name are not eligible. Plus, you won't benefit from this tax break unless your 2023 澳洲幸运5官方开🐠奖结果体彩网:modified adjusted gross income (MA♋GI) is less than $167,800 if married or $106,850 if single.

If you prefer to invest in 澳洲幸运5官方开奖结果体彩网:mutual funds to save for a child's college education, you may also want to consider a 529 plan or a 澳洲幸运5官方开奖结果体彩网♌:Coverdell Educ🔯ation Savings Account (ESA). The Setting Every 🐎Community Up for Retirement Enhancement (SECURE) Act signed into law by then-President Donald Trump in December 2019 expands the use of 529 plans and ESAs by allowing up to $10,000 to be used for 澳洲幸运5官方开奖结果体彩网:student loan payments. Funds in these plans may also be used to cover the costs of an apprenticeship program, provided the program is approved by the United States Department of Labor.

The SECURE Act 2.0 added another benefit. 529 plans that have been open for at least 15 years are now eligible to roll funds over into a Roth IRA for the beneficiary. There's a lifetime maximum of $35,000 eligible, and funds must be transferred via current transfer limits.

Both 529 plans and ESAs offer tax-deferred growth as long as the money remains invested. Here's how these plans differ:

• Maximum Annual Contribution: You can contribute up to $2,000 per year per child into an ESA. 529 plan beneficiaries can have a maximum 澳洲幸运5官方开奖结果体彩网:account balance between $235,000 and $550,000, depending on the state.
• Tax-Free Distributions: 澳洲幸运5官方开奖结果体彩网:Distributions from both plans that are used to pay for qualified education expenses are tax-free. But you can also make tax-free withdrawals from an ESA to pay for private kindergarten, elementary school, and high school expenses like books and fees. 529 accounts can only be used for K–12 tuition.
• Income Limitation: The amount of your ESA interest exclusion is gradually reduced if you're a single filer and your MAGI is between $110,000, or if your MAGI is between $220,000 and you file a joint return. You cannot exclude any interest if your MAGI is over the limits. With a 529 plan, there are no income limitations.

This may have you wondering which opportunity makes the most sense for you. There isn't a simple answer. It all depends on your specific situation and how much you plan to save for your child's education.

Tax Credits for College Tuition

A federal tax credit, known as the Lifetime Learning Credit, is equal to 20% of the first $10,000 of qualified educational expenses incurred each year providing you with a tax savings of up to $2,000 per year.

Like many other provisions, there is an income threshold for these tax breaks as well. For full credit, your MAGI for 2023 must be less than $80,000 for singles and less than $160,000 if 澳洲幸运5官方开奖结果体彩网:married filing jointly (unchanged for taxable years beginning after Dec. 31, 2020).

Additionally, some states offer a tax credit for contributions to a 529 plan. For example, Indiana taxpayers can get a state income tax credit equal to 20% of their contributions to a CollegeChoice 529 account, up to $1,500 per year ($750 for married filing separately). In Vermont, filers can get a 10% tax credit on as much as $2,500 given for a single beneficiary, or $5,000 for a joint beneficiary, meaning the maximum tax credit per taxpayer is $250 per beneficiary or $500 for married filing jointly.

More Tax Breaks

If you work full-time while taking classes, the government allows your employer to pay up to $5,250 toward your education each year including tuition, books, supplies, and equipment. Under the current rules, this tax-free benefit applies to undergraduate and graduate-level classes.

Don't forget to consider the student loan interest deduction. Each year, you can deduct up to $2,500 of student loan interest paid. This deduction, which is also available to non-itemizers, begins to phase out at $155,000 for married couples filing jointly ($75,000 for single filers) and completely phases out at $185,000 ($90,000 for single filers) in 2023.

The Bottom Line

Paying for college is expensive, and most people need to leverage every benefit possible. Luckily, there are tax advantages to many college saving accounts. These tax advantages, together with the financial aid package granted to you based on your Free Application for Federal Student Aid (FAFSA), can put higher education within your reach.