Save Money For College With These Tax Deductions And Credits
Tax deductions work to reduce your taxable income. For example, if you earn $50,000 in adjusted gross income as a single filer and claim a tax deduction worth $1,000, your net taxable income becomes $49,000. With this income, you fall into the 22% income tax bracket, saving you $220 in taxes, all things equal.
Retirement Account Contributions (IRA)
Regardless of how you choose to invest, the tax code awards this behavior by offering you the ability to deduct your contributions from your taxable income if you make them into a traditional IRA.
Capital Gain Losses
When you choose to sell your losing positions, you can harvest these tax losses to lower your taxable income. Each year, you can offset your capital gains with capital losses and claim up to $3,000 in losses against your earned income.
American Opportunity Tax Credit
This credit can be worth up to $2,500 per year for four years of schooling after high school if enrolled at least half-time and working towards a degree. To claim the full credit, you can claim the first $2,000 of qualified expenses and then up to 25% of the next $2,000, or $500, totaling $2,500.
Lifetime Learning Credit
This credit does not carry a minimum enrollment amount (meaning you don’t need to be enrolled at least half time), and you don’t need to work towards a degree. Down the road, if you choose to return to school to earn additional credentials or need to take continuing education coursework to maintain licenses, you can apply the Lifetime Learning Credit to your tax bill.
Recovery Rebate Tax Credit
As part of the CARES Act, many Americans received a stimulus check or two. If you aren't claimed as a dependent on someone’s tax return in 2020, and you didn't receive a check, you could claim the Recovery Rebate Tax Credit on your return.
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