A 529 is a great way to save for education expenses. Withdrawals are tax-free when used on qualified education expenses. However, if the money is withdrawn for non-qualified expenses or if there is money left over to be withdrawn after all expenses are paid this is considered taxable income. In addition to paying taxes on the leftover amount, you will also incur a 10% penalty for these withdrawals.
Currently taxpayers can claim a tax credit of $2,000 per child under age seventeen. The American Rescue Plan raises that amount to $3,600 for children under age six and $3,000 for those between six and seventeen. This change means additional tax credit per child, and it allows those that are seventeen to now qualify as well. While the majority of families with minor children will qualify for this additional tax credit, there are income limits that will restrict others.
Itemized deductions are a range of expenses that are deductible on your taxes. These include mortgage interest, property taxes, medical and dental expenses that exceed 7.5% of your adjusted gross income, charitable donations and more. Itemized deductions reduce your taxable income significantly, resulting in less taxes paid and, in some cases, even a lower tax bracket.
Amending a tax return in your favor can give you money back that you had not been entitled to before these changes. Amendments such as claiming overlooked deductions, IRS rule changes, miscalculations and a corrected 1099 or W2 can all work in your favor, giving you a larger return. You will want to make changes to past tax returns if there are errors that may be flagged by the IRS, including unreported income.
The Child Tax Credit (CTC) is worth up to $2,000 per child or other dependent that is younger than seventeen years old. To qualify, you must earn an annual income of at least $2,500. For single filers, this credit begins to phase out at $200,000 annual revenue and $400,000 for couples filing jointly.
Full-time college students may be eligible for several tax credits that can offset the burden of paying for their education. One of the largest is the American Opportunity Tax Credit (AOTC). This credit is available for the first four years of post-graduate school and allows up to $2,500 per eligible student.