Advertisement
Paying for College

How to Tap College Savings

If you want to take advantage of the American Opportunity tax credit this year, you can't use 529 plan money to pay all the college tuition bills.

My daughter will be starting college this fall and the tuition bill is due soon. What is the best way to coordinate our 529 savings plan with the new college tax credit?

Before you tap your 529 plan for this semester’s tuition bill, see whether you can take advantage of the American Opportunity credit, which provides a tax credit of up to $2,500 each year for eligible college costs paid in 2009 and 2010. You can’t double dip on tax breaks, so you won’t get this one if you pay all the college bills with money from a tax-favored college-savings plan, such as a 529 plan or a Coverdell education savings account.

Advertisement - Article continues below

The American Opportunity Credit temporarily replaces the Hope credit, but the income limits are much higher -- your adjusted gross income must be less than $90,000 if you’re single or $180,000 if you’re married filing jointly. If you qualify, you can deduct from your tax bill 100% of the first $2,000 you pay for eligible expenses, plus 25% of the next $2,000 of eligible expenses. Money you spend on tuition, fees and books in the first four years of college can count toward the credit.

Most families won’t have a problem spending $4,000 on college expenses to capture the full American Opportunity credit, then using the 529 and Coverdell money for any remaining portion of the tuition bill, plus room and board. You can even use the 529 money to buy a computer and Internet access for your college student in 2010.

For more information about saving for college and paying the bills, see our Paying for College special report. For more details about the special tax breaks for college expenses, see IRS Publication 970.

Advertisement
Advertisement

Most Popular

7 Surprisingly Valuable Assets for a Happy Retirement
happy retirement

7 Surprisingly Valuable Assets for a Happy Retirement

If you want a long and fulfilling retirement, you need more than money. Here are the most valuable retirement assets to have (besides money), and how …
August 3, 2020
Turning 60 in 2020? Expect Lower Social Security Benefits
Coronavirus and Your Money

Turning 60 in 2020? Expect Lower Social Security Benefits

When you file for Social Security, the amount you receive may be lower.
July 30, 2020
Retired? Good Luck Getting a Mortgage, Even If You’re Wealthy
mortgages

Retired? Good Luck Getting a Mortgage, Even If You’re Wealthy

One 70-year-old’s story highlights the challenges. Prepare for more paperwork and hoops to jump through than you could imagine.
August 2, 2020

Recommended

College During COVID
Paying for College

College During COVID

Students and their families must be ready to adapt to the changes in the way they attend—and possibly pay for—college.
July 30, 2020
How COVID-19 Is Changing the Way Families Save for College Costs
college

How COVID-19 Is Changing the Way Families Save for College Costs

CollegeFinance.com's Kevin Walker joins our Your Money's Worth podcast to discuss how the global health pandemic is impacting the way families plan a…
July 28, 2020
This Olympian Has a New Goal: Closing the Wealth Gap
Financial Planning

This Olympian Has a New Goal: Closing the Wealth Gap

She encourages advisers to introduce students to financial planning.
July 21, 2020
7 Ways the Pandemic Will Change College Forever
college

7 Ways the Pandemic Will Change College Forever

Colleges and universities face steep budget cuts, enrollment challenges and new types of competition as a result of COVID-19. We cover the changes you…
June 19, 2020