igher education can be hard on your wallet. Fortunately, federal tax breaks may ease the burden. As year end approaches, carefully timing qualified expenses and coordinating education tax credits, scholarships and Section 529 plan withdrawals may help your family maximize these tax-saving opportunities.
Consider year-end payments
For education credits, timing is critical because expenses generally count in the year they're paid. Qualified expenses paid in 2026 can support a 2026 American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC) if they're for an academic period beginning in 2026 or during the first three months of 2027.
That rule may create a year-end planning opportunity. Suppose a college's spring semester begins in January 2027, and tuition is due in January. Paying the bill in December 2026 could make the eligible expense available for a 2026 credit rather than a 2027 credit.
The AOTC equals 100% of the first $2,000 of qualified tuition and related expenses and 25% of the next $2,000, for a maximum credit of $2,500 per eligible student per year. The LLC equals 20% of up to $10,000 of qualified expenses, for a maximum $2,000 credit per tax return per year. Additional eligibility requirements apply, and the credits begin to phase out when modified adjusted gross income (MAGI) exceeds $80,000 and are eliminated at MAGI of $90,000 (twice these amounts for married couples filing jointly). Married taxpayers filing separately aren't eligible.
If an income spike in 2026 will cause your credit to be eliminated this year but you expect to be fully eligible next year, consider the opposite approach: Hold off on paying the spring semester tuition until January 2027.
Coordinate education benefits
Because the same education expense generally can't support more than one federal tax benefit, careful coordination is important. For example, you can't use the same $4,000 of tuition both to claim the AOTC and to support a tax-free 529 plan distribution.
If a student has enough eligible expenses, consider reserving tuition and other credit-eligible costs for an education credit and using 529 plan funds for other qualified expenses that don't support the credit. Before taking a 529 plan distribution, also account for scholarships and grants, and make sure you have sufficient qualified expenses in the same tax year as the withdrawal. If distributions exceed adjusted qualified expenses, part of the earnings portion will be taxable and may also be subject to a 10% penalty.
Seeking guidance
Before making a year-end tuition payment or 529 plan withdrawal, total the student's expected expenses, scholarships and other educational assistance. Then determine which expenses should be assigned to each available tax benefit. Contact us to discuss how the rules apply to your family.
Sidebar: The tax-saving power of 529 plans
Section 529 plans provide a valuable tax-advantaged way to fund education expenses. Although contributions aren't deductible for federal purposes, any growth is tax-deferred. Distributions used to pay qualified expenses are income-tax-free for federal purposes and potentially also for state purposes.
A 529 plan can cover a broader range of college costs than education tax credits can. Qualified 529 plan expenses generally include tuition, required fees, books, supplies and equipment, as well as room-and-board costs for students enrolled at least half time. Education credits generally don't cover room and board.