Canadians celebrate their Thanksgiving in October. I like that timing. It doesn't force folks into attending two annual family gatherings within a month of each other.
Not that I don't love my family, but like many things, a little goes a long way. And don't worry. I know which relatives (and there are plenty!) are thinking, if not saying, the same about me.
But during this week that we Americans are preparing to say thanks for our annual bounty (and, thanks to the presidential election, experience an even more awkward holiday than ever before), it's another special time for our neighbors to the north.
Thankful for learning: It's Education Savings Week in Canada.
My fellow personal finance bloggers up North are marking this week with posts and a special Twitter conversation at #EduSaveWeek. Among the options getting a lot of attention are the Canada Learning Bond and Registered Education Savings Plans.
Again, O Canada, I'm all in with you, this time on ways to save for higher education. And again, O Canada, your timing also works well here below the 49th parallel.
Lots of elementary, middle and high school kinds across the United States have this full week off, at least they do here in the Austin area. And lots of colleges also are taking a break so those students can spend Turkey Day at home.
But this recess from schoolwork is the perfect time for a refresher course on how the U.S. tax code can help students and their parents cover some of the ever-increasing costs of schooling.
Here are five tax- and money-saving educational options.
1. 529 plans
These savings vehicles are named after the section of the Internal Revenue Code that governs their operation. The accounts are established for the benefit of a student and anyone can contribute to them. The money put into a 529 is not tax deductible by the person(s) making it, but the funds in the account grow tax-free. And when some is withdrawn to pay eligible higher education expenses, that distribution is tax-free, too.
Although 529 plans were created as part of the federal tax code, they are administered by the states. And some states also provide tax breaks for those who take advantage of the plans. You can find out more about these college savings plans in my prior post commemorating 529 Day.
2. Coverdell Education Savings Account
This savings plan originally was called an education IRA, but was renamed the Coverdell Education Savings Account, or ESA, in honor of the late U.S. Senator Paul Coverdell who championed the savings option. Like a 529, an ESA is set up for a student, who's known as the beneficiary, and other folks can put up to $2,000 a year into the account. That's a combined $2,000 for each child, not per ESA and not $2,000 per contributor.
There are age limits for the kids for whom an ESA is established, and income limits for the donors. You can read more in my prior post on Coverdell accounts. But I do want to reiterate here that while the $2,000 annual contribution limit is relatively small, the money can be used for some pre-college expenses.
3. Educational tax credits
Long-time readers of the ol' blog know that I'm a huge fan of tax credits. They generally are better than deduction because they provide dollar-for-dollar reductions in your tax bill. In some cases, tax credits can not only wipe out what you owe, but even get you a refund. There are two popular education credits every student and his/her family need to check out.
The American Opportunity Tax Credit, AOTC, now is permanently in the tax code, essentially replacing the Hope Credit. The AOTC provides qualifying students with a maximum $2,500 tax credit. Even better, the AOTC offers eligible lower-income taxpayers a tax refund of up to $1,000.
The AOTC covers many costs during a student's first four years in college, but there's also a tax credit for older students and graduates who are looking to improve themselves and their careers via continuing education. The Lifetime Learning Credit provides up to $2,000 in tax savings.
You can find out more about these two tax credits, as well as an education tax deduction that's coming up next, in the table that's part of my earlier blog post lesson on education credits and the tuition deduction.
4. Tuition and fees deduction
I know I said credits are better than deductions, but if a deduction is what applies in your case, then definitely take it. When it comes to educational costs, the tuition and fees deduction can help reduce your income, and correspondingly your eventual tax bill, by as much as $4,000.
Even better, this income reduction is what's known as an above-the-line deduction. That means you can claim it directly on Form 1040 or 1040A without having to itemize.
The bad news is that this educational tax break expires at the end of 2016. It's part of the tax extenders package, a group of laws so named because they are not permanent parts of the tax code and must be periodically extended by Congress. We won't know for a few weeks (or longer) whether the tuition and fees deduction will be available for 2017 or beyond, but it still is in effect for the 2016 tax year. So if you can use it on your coming return next spring, take it.
5. Student loan interest deduction
With the escalating costs of college, credits and deductions can only go so far. That's why so many of today's students and their families also take out loans to pay higher educational costs. But some of the interest -- up to $2,500 -- on those loans also could be tax deductible.
Like the tuition and fees deduction, this write-off is available without having to itemize your deductions on Schedule A.
I hope that all the students home for the U.S. Thanksgiving holiday have a nice break and good time with their families.
And I also hope that some of these tax benefits can help make paying for the return to or upcoming enrollment in college something to be thankful for, too.
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