Let’s look at some tax breaks for education, now that kids are back in college. Withdrawals from 529 plans used for postsecondary education are tax-free. Eligible expenses include the cost of tuition, books, supplies, computers, internet and mandatory fees. Room and board qualify for students enrolled at least half-time.
The American Opportunity Tax Credit is worth up to $2,500 per student for each of the first four years of college. It’s based on 100% of the first $2,000 spent on qualifying college expenses and 25% of the next $2,000. This juicy break starts to phase out for individuals with adjusted gross incomes above $80,000… $160,000 for marrieds…and ends when AGI tops $90,000 and $180,000 respectively. The student must be in school at least half-time and eligible expenses include tuition, books and required fees. But the cost of room and board doesn’t qualify for the credit.
Also, interest on EE and I bonds used to pay for education may be tax-free, provided certain rules are followed. The bonds must have been purchased after 1989by taxpayers who were at least age 24 in the month before buying the bonds. The bonds must be redeemed to pay for college or graduate school tuition and fees for the taxpayer, spouse or dependent. Vocational schools also qualify for the break. Room-and-board costs aren’t eligible expenses for this purpose. Additionally, the bonds are required to be in the taxpayer’s name, not the name of the child.
The exclusion is subject to income limits. For 2017, it begins to phase out for couples with modified adjusted gross income over $117,250…$78,150 for singles. The tax break disappears when modified AGI hits $147,250 and $93,150 respectively.