Saturday, July 5, 2014
Experts advise families to use tax-advantaged college investment accounts known as 529 plans to save for future education expenses. However, students planning to attend community college could miss out on education tax credits by using a 529 plan.
The federal government does not allow two tax benefits on the same money. Earnings on money saved in 529 plans and distributed for education is not taxed by the federal government, which is a tax benefit. Federal tax credits are also considered tax benefits.
In the case of a community college student, tuition, fees, books and supplies are likely to total less than the amount of the tax credit. Therefore, families may be better off choosing the tax credit over the 529 plan fund.
The American Opportunity Tax Credit can give families up to a $2,500 refund on their taxes. Families who qualify have to spend over $4,000 on an individual student to receive the full credit before 529 plans should be used.
If a child plans to attend community college, yet families do not have the funds available outside of a 529 plan, experts recommend using a payment plan. “Most college payment plans will credit the student’s account in full as soon as the payment plan is in place, but the actual monthly payments are due later.”
See Reyna Gobel, Balance Tax Credits, 529 Plan Savings for Community College, U.S. News & World Report, July 2, 2014.