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Savings and tax breaks for education

Section 529 Plans
Among the most popular education accounts are the Section 529 college savings plans, which take their name from Section 529 of the U.S. tax code. It allows parents, grandparents other relatives, and friends to open an account and invest in a variety of stock and fixed-income accounts on behalf of a beneficiary. Savings grow tax free, and contributions and any earnings used to pay for qualified higher education expenses are federal and California income tax-free.  Each state has its own plan. For California, check out ScholarShare, California's 529 College Savings Plan. California state residency is not required. However, investors residing outside of California should consider their own state's plan first as it may have tax advantages that are only available through that state's plan.

Overview of education tax benefits
When paying tuition and other related expenses, you be eligible for certain tax benefits associated with education-related expenses.

Tax credits
There are currently two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax: the Hope credit and the lifetime learning credit.

Tax Deductions — lower your taxable income with these breaks:

  • Tuition and Fees Deduction — for a student for whom no education credit is claimed. Qualifying expenses must not have been paid with any other tax-free benefit. A maximum deduction of $4,000 if taxpayer’s modified adjusted gross income does not exceed $80,000 ($160,000 on a joint return).
  • Deduction for work-related education — claim costs of education required to keep your job or to maintain or improve skills needed in your present work, but not if the education is needed to meet the minimum requirements of your position or is part of a program to qualify you for a new trade or business.
  • Student loan interest deduction — maximum deduction of $2,500 for interest paid on qualified student loans available if your modified adjusted gross income is less than $75,000 ($150,000 if filed a joint return).
Employer-paid courses are tax-free 
If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year.


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