Q&A: 529 plans vs. education tax breaks

Dear Liz: You recently mentioned in your column that you can’t use any of the three education tax breaks — the American Opportunity Credit, the Lifetime Learning Credit or the tuition and fees deduction — for expenses paid with 529 college savings plan money. This has me wondering if those 529 plans are really worth it.

Wouldn’t you have to have a really large amount invested to have enough earnings to make it worth not taking one of the credits?

Answer: If college were cheap, that might be a problem. But most people have far more college expenses than they can write off on their tax returns.

The average net price for one year at a four-year college — the published cost minus free financial aid such as grants and scholarships — was just under $13,000 last year, including tuition, fees, room and board. The average net price was around $6,000 at two-year public colleges and $23,550 at private four-year schools.

Many people pay a lot more, as the sticker prices at colleges continue to rise.

As mentioned in the previous column, the three available tax breaks are mutually exclusive, so you can’t take more than one in any given year.

The most generous credit, the American Opportunity Credit, reduces taxes dollar-for-dollar for the first $2,000 of college expenses and then by 25% of the next $2,000 — for a total of $2,500 per student.

If your qualified education expenses exceed $4,000, as they probably will, those tax-free 529 plan withdrawals will come in handy.

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