Take Advantage of Education Tax Breaks
The American Opportunity tax credit can help offset the cost of college tuition.
My son will be starting college this fall, and we’ll be paying his first tuition bill this summer. We have money in his 529 plan and will need to use some cash from our regular bank account, too. Which account should we withdraw from first?
DOWNLOAD: Smart Ways to Save for College
Before you tap the 529 account for this semester’s tuition bill, see whether you can take advantage of the American Opportunity tax credit, which provides a tax credit of up to $2,500 each year for eligible college costs. You can’t double-dip on tax breaks -- that is, use a tax-free distribution from a 529 or Coverdell education saving account to cover the same expenses for which you claim the tax credit -- so you may not be able to qualify for the credit if you pay all of the bills from the 529.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
To qualify for the American Opportunity tax credit, your adjusted gross income must be less than $90,000 if you are single, or $180,000 if you’re married filing jointly (the size of the credit starts to phase out at $80,000 for singles and $160,000 for couples filing jointly). Money you spend on tuition, fees and books in the first four years of college can count toward the credit.
The credit is worth 100% of the first $2,000 you pay for eligible expenses, plus 25% of the next $2,000 of eligible expenses. So, you could pay at least $4,000 of the tuition bill from your bank account, then use the 529 for any remaining portion of the tuition bill, plus room and board (room and board qualifies for 529 money but not for the American Opportunity credit). For details, see IRS Publication 970 Tax Benefits for Education. Also see my column about Tax Breaks and Credits for College Costs.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.
-
Is Indulging Your Vice Putting Your Retirement at Risk?
From alcohol to gambling, adults spend a lot of money pursuing their vices, but are they jeopardizing their retirement nest eggs?
By Donna Fuscaldo Published
-
Stock Market Today: Investors Respond to the Usual Uncertainty
Stocks surged late but the major indexes closed mixed as the search for market leadership continues.
By David Dittman Published
-
Trump Wants You Out of the IRS, But You'll Have to Wait Until May
IRS Some IRS employees won’t be able to resign using the buyout offer until the end of tax season.
By Gabriella Cruz-Martínez Published
-
Key Family Tax Breaks Are on the GOP Chopping Block This Year
Tax Credits Several tax breaks, including the Child Tax Credit, may face reforms or be cut entirely as lawmakers seek revenue for Trump’s tax plans.
By Gabriella Cruz-Martínez Last updated
-
What's Going on With New Jersey Property Tax Programs?
Property Tax ANCHOR and ‘Senior Freeze’ just got a refresh, and there’s a new program: Stay NJ. Learn how to save on New Jersey property taxes.
By Kate Schubel Published
-
Five States With the Largest EITC Checks
EITC Households in these states received a larger Earned Income Tax Credit (EITC) last year.
By Gabriella Cruz-Martínez Published
-
Downsize in Retirement With 2025 Tax Benefits: Three Key Strategies
Retirement Taxes Downsizing retirees may benefit from tax savings, lower utility bills, and freed-up income. But could a new presidency impact your home sale?
By Kate Schubel Published
-
IRS Direct File 2025 Offers A New Way to File Taxes for Free
Tax Filing See if you qualify for this free IRS tax filing program since tax season begins January 27.
By Kate Schubel Last updated
-
Why Digitizing Your Tax Records Can Simplify Your Filing in 2025
Tax Records If you can, switching from paper to e-filing your taxes can have many benefits.
By Gabriella Cruz-Martínez Published
-
Gov. Hochul Vows to Deliver $1 Billion in Tax Relief to New Yorkers
State Tax The proposed tax cuts would benefit New York middle-class families.
By Gabriella Cruz-Martínez Published