By Mark Sipos, Director, LFG Tax Services
As students head back to the classroom, it’s a great reminder that education isn’t just an investment in the future, it can also provide valuable tax savings today. Whether you’re paying college tuition, saving for a child’s education, or helping a grandchild prepare for the future, there are several tax strategies worth reviewing before year-end.
Education Tax Credits Can Reduce Your Tax Bill
If you or a dependent is attending college, you may qualify for one of two valuable federal tax credits:
American Opportunity Tax Credit (AOTC)
- Worth up to $2,500 per eligible student each year for the first four years of undergraduate education
- Covers tuition, required fees, and certain course materials
- Up to 40% of the credit may be refundable if you qualify
Lifetime Learning Credit (LLC)
The Lifetime Learning Credit is worth up to $2,000 per tax return each year and is available for undergraduate, graduate, and continuing education courses. It’s ideal for taxpayers pursuing additional education or job-related training
Because income limits apply, it’s important to plan ahead to determine which credit provides the greatest benefit.
529 Plans Continue to Be One of the Best Education Savings Tools
A 529 plan allows investments to grow tax-free, and qualified withdrawals for education expenses are also tax-free. In addition to college tuition, 529 plans can now be used for:
- K-12 tuition (subject to annual limits)
- Certain apprenticeship program expenses
- Student loan repayments (subject to lifetime limits)
- In some situations, unused 529 funds may even be rolled into a Roth IRA for the beneficiary if specific requirements are met
Starting early allows investments more time to grow while creating flexibility for future education expenses.
Ohio Tax Benefits for Scholarship Donations
Ohio taxpayers have another opportunity to support education while reducing state taxes. Donations to approved Scholarship Granting Organizations (SGOs) may qualify for an Ohio income tax credit. These organizations provide scholarships that help eligible students attend participating private schools. This credit can reduce your Ohio income tax while helping families access additional educational opportunities. As with many tax incentives, annual limits and program funding may affect availability, so early planning is recommended.
UTMA Accounts Still Have a Place
Many grandparents and parents establish Uniform Transfers to Minors Act (UTMA) accounts to help children build savings. UTMAs offer flexibility because the funds may be used for any purpose that benefits the child—not just education. However, unlike 529 plans, investment earnings may be taxable each year, and larger balances can affect college financial aid eligibility. Once the child reaches the age of majority, the assets legally belong to them. For some families, an UTMA is an excellent complement to a 529 plan rather than a replacement.
Make Education Part of Your Overall Tax Strategy
Every family’s situation is different. Coordinating education tax credits, 529 withdrawals, scholarship opportunities, and gifting strategies can maximize tax savings while helping achieve long-term education goals. If you expect to pay education expenses in the next few years, or you’re helping children or grandchildren prepare for college, now is an excellent time to review your options. We’re happy to help you evaluate the strategies that best fit your family’s education and tax planning goals.
