Educational savings

Researching the education savings options available to parents and other family members is another way to get some tax savings. 529 plans are designed to boost college savings; no deduction is available for the contributions, but the money grows tax free in the plan, and the money paid from these accounts for qualified education expenses is not taxable. A Coverdell Education Savings Account can be used to pay for qualified elementary, secondary and higher education expenses; the contributions to Coverdell accounts aren’t deductible, but the contributions grow tax free. Education costs can be offset by eligible taxpayers by taking either the Hope Scholarship Credit or Lifetime Learning Credit. Tax deductions are available to qualified taxpayers for up to $2,500 of interest paid on student loans, and thus some money can be saved.

A special tax rule allows an employee to exclude from gross taxable income on the tax return and from wages for employment tax purposes up to $5,250 annually paid by his or her employer for educational assistance. Only reimbursements for undergraduate-level course work qualify for the educational assistance exclusion from your tax return. This tax law allows the employer to deduct on its tax return the cost of these educational assistance benefits and does not need you to treat the payments as taxable income on your tax return.