Making the Most of Education Tax Benefits in header of articles
Making the Most of Education Tax Benefits in content page of articles
Most 4-year college programs extend over 5 tax years, which can help maximize your tax credits. To learn more, see the Tax Credits for Higher Education tax tip.
For credits you can claim over only 4 years, you should know your options beyond the fourth year.
Ex: You can only claim the American Opportunity Credit 4 times. However, you can claim the Lifetime Learning Credit at any time that you, your spouse, or your dependent are in college.
Not Claiming a Child as a Dependent
The American Opportunity and Lifetime Learning Credits have income phase-outs. If you can't claim 1 of the credits because of the income limits, you can let your child claim the credit. Before doing this, consider:
Most education credits aren’t refundable, so you don’t benefit from them unless you have a tax liability.
The American Opportunity credit is up to 40% refundable. This credit isn't available to anyone claimed as a dependent. If your child would get a greater benefit from claiming the credit, you can let your child claim the credit as long as you don't claim the child as a dependent. However, the refundable portion of the credit is usually not available to anyone who's both:
Under age 24
Doesn't provide more than 1 / 2 of his or her own support
If you qualify to claim your child as a dependent but don’t do so, your child can't claim a personal exemption on his or her individual return.
Rollover or Change of Beneficiary on an Education Savings Account
The Coverdell education savings account (ESA) comes with certain requirements. If you don’t comply with these requirements, a 10% penalty will apply to the withdrawal. One of the requirements is that the funds must be fully withdrawn within 30 days of the death of the beneficiary or the beneficiary’s 30th birthday to avoid penalty.
If you have money left in an ESA after a child graduates or reaches age 30, you can:
Change the ESA’s beneficiary to another family member
Roll over ESA funds into an existing account of another family member
The change of beneficiary and rollover will be tax-free if both of these apply:
The family member is under age 30.
You complete the transaction within 60 days.
The age limitation doesn't apply if the new beneficiary is a special-needs beneficiary. Also, for each Coverdell ESA you have, you can roll over money only once in a 12-month period.
To learn more, see the Education Savings Accounts (ESAs) tax tip.
Deadline for Contributions to an ESA
You must make your ESA contribution by the time your return is due (usually April 15). Make your contribution as early as possible, though, to take advantage of the account's tax-free earnings.
An advantage of having an ESA is that you can pay educational expenses with tax-free ESA earnings. You also might qualify for 1 of the other educational tax benefits, like the American Opportunity Credit or the Lifetime Learning Credit. However, you can’t use the same expenses for both tax breaks.
To learn more, see IRS Publication 970: Tax Benefits for Education.