Can State Prepaid College Tuition Expenses Be Claimed on Income Taxes?

Prepaid tuition and tax savings can make college more affordable.
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With college costs on the rise, locking in today's prices for tomorrow's education makes sense. But don't stop there; make sure you get the most bang for your buck by cashing in on all the education tax credits and deductions for which you qualify. Even with a 529 plan or qualified tuition plan, you may qualify for additional tax breaks or education credits on top of your prepaid tuition benefit.

Prepaid Tuition Plans

Prepaid tuition plans are available in many states. These plans are also called 529 plans or qualified tuition plans. The benefit of a prepaid tuition plan is that you can lock in today's tuition costs at in-state public colleges and universities for a future education. It is guaranteed by the state and could potentially save you a lot of money. The amount that tuition rises in the future is the money you make off of the plan. This doesn't even take into account any tax benefits.

Tax Treatment of Contributions

The payments or contributions you make toward the prepaid tuition plan are not tax-deductible on your federal income taxes. You will not receive a Form 1099-QTP to report money from the plan until you actually use the benefits. However, you may realize some tax breaks, including deductions or even matching contributions, from your state. Research your state's tax treatment and compare plans to make sure you get the best tax treatment for your situation. Contributions made on behalf of a beneficiary generally do not incur the gift tax.

Tax Treatment of Benefits

The money you tuck away in prepaid tuition is tax-free money. Section 529 of the Internal Revenue Code states that "a qualified tuition program shall be exempt from taxation." This means that as long as you use the plan to pay for qualified educational expenses, your money grows tax-free, and withdrawals or its future-value is tax-free for you and the beneficiary. Qualified educational expenses can include tuition, fees, books, supplies, equipment, room and board. Actual expenses depend on enrollment status and situation. You will receive a Form 1099-QTP for all distributions.

Coordinating with Tax Breaks

You can coordinate other tax benefits with your prepaid tuition plan as long as you do not double-dip. This means you must have eligible expenses that were not covered in full by your prepaid plan or other tax-free funds. Deduct the amount of tax-free money from your qualified educational expenses -- if expenses remain, you may be able to claim the tuition and fees deduction, the American Opportunity Credit or the Lifetime Learning Credit.

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