HIGHER EDUCATION: Use Tax Breaks to Lower College Costs

The federal government and many states offer incentives to help you save and pay for school.  

- SANDRA BLOCK

It's often said that buying a house is the largest investment most of us will ever make. But if you have a couple of children, the cost of sending them to a four-year college could exceed even that big-ticket item. Three kids or at least one with Ivy League aspirations? That's a house and a vacation home.

The average annual cost of tuition, room and board for a four-year in-state public college in 2021 was $22,690 a year, while the average annual cost of a four-year private school was $51,690, according to the College Board. But for Ivy League and many selective private colleges, the annual cost is more than $75,000. Fortunately, just as the government provides tax incentives for home buyers, the tax code includes a lot of credits and deductions designed to lower the cost of college.

TAX BREAKS FOR SAVERS

529 plans. The most effective way to save for college is to start contributing to a 529 college-savings plan while your child is still in diapers. Contributions aren't deductible on your federal tax return, but the money grows tax-free, and withdrawals are tax-free as long as the money is used for qualified expenses, which include tuition, room and board, books, computers, and internet access. If your child receives a scholarship and doesn't need the money, you can change the beneficiary to another eligible child or family member.

Some states allow you to deduct a portion of your contributions from your state taxes, usually as long as you invest in your own state's plan (for a rundown, go to www.saving forcollege.com). If you don't use the money for college, the earnings portion of your account will be subject to income taxes and a 10% penalty.