CHICAGO (Reuters) - All that tuition you pay has one silver lining: tax breaks.
If you want to make sure to be able to claim the most possible when your tax return is due in April, then you may want to make some moves now to prepay some bills or to max out your retirement accounts to lower your income.
* If you have young kids
Federal tax law changes this year let families use up to $10,000 per year from a 529 college savings plan to pay private school tuition. But beware: Not all states mimic the new federal rules, and you could be hit with state tax penalties or have to pay back past state deductions or credits. Check your state (bit.ly/2O5Coar).
If your state does copy the new federal law and rewards 529 contributions annually, there might be a new tax opportunity. People can spend some 529 savings for K-12 tuition each year and then replace the sum with new contributions, said Boca Raton, Florida, financial planner Sean Moore.
Each year that you make a new contribution you may get a state deduction or credit, Moore said.
When you start using the 529 savings for college, you must follow a key rule, though. If you use the 529 to pay the full cost of tuition in a single year, and then claim the college tax credit for the same year, you could be taxed and penalized on your 529 withdrawals for “double dipping,” according to Joseph Hurley, a co-author of the book, “Savingforcollege.com’s Complete Guide to 529 Plans.”
* If you have kids in college
The American Opportunity Credit is worth as much as $2,500 per student each year – but only if you have spent enough.
You get 100 percent of the first $2,000 tuition and fees you pay a year; then 25 percent of the next $2,000. If you are under that amount, see if you can pay upcoming bills before 2018 ends.
For the full credit, your individual adjusted income – what is left after deductions like retirement savings and alimony - cannot exceed $80,000 and couples $160,000. Partial credit is possible up to $90,000 for singles and $180,000 for couples.
If you are close to the cutoff, saving more for retirement in the next few weeks could bring your income down by thousands of dollars, said Andy Phillips, director of The Tax Institute at H&R Block.
If you are not contributing the maximum amount to your retirement accounts, start there. Then go to health savings accounts (HSAs) or business plans such as SEP IRAs. Not everyone can live with less in their paychecks, but Moore said: “It could be worth living frugally and pulling money from a savings account if available. You get $2,500 of free money.”
Moore recently advised a client to put all he could into his 401(k) this year because he turned 50. At that age, people can stash $24,500 a year; not the $18,500 for workers under 50. So Moore told the man to put almost all of his pay into his 401(k) during the last months of the year.
* If you are paying for grad school
If you or a child are in graduate school or taking a course to advance in your job, the Lifetime Learning Credit is worth $2,000, or 20 percent of the first $10,000 you spend. Make sure that you pay enough tuition in 2018 to get the maximum credit, and cut your income if possible below $56,000 if single and $112,000 if married. You can get a partial credit up to $66,000 for singles and $132,000 if married.
* If you are paying off loans
Interest payments may be worth a tax deduction up to $2,500. But keep in mind: Deductions are not as valuable as credits. So before trying to maximize the deduction by lowering income with extra retirement savings, consider the value of getting rid of student loans as quickly as possible. Said Moore: “If you have the extra money, pay down the loan.”
(The opinions expressed here are those of the author, a columnist for Reuters.)
Editing by Beth Pinsker and Tom Brown