With college costs acting like a Grinch on stressed-out household finances, families can't afford to miss out on tax savings they can secure with a little end-of-the-year planning.
Whether you are paying off loans for your own education or paying tuition for a child in college or technical school, you can enlist Uncle Sam to help you out.
And you should, because most families need all the help they can get.
Here are some steps to take before year-end.
When parents or students pay for tuition for technical training, college or graduate school, Uncle Sam will help out, sometimes with more than a $2,000 refund on taxes each year if income levels fall within a particular range.
But waiting until tax time to find out your pay was too high could undermine your ability to qualify for tax credits, which reduce your tax bill dollar for dollar. Now is the time to look at the income limits Uncle Sam imposes and do all you can to make sure you fall within them.
The goal: qualifying for the Hope Credit for students in their first two years of college, or the Lifetime Learning Credit, which applies for education during college, graduate school, technical training or extra courses later in life.
The Hope Credit itself might provide you with a tax refund of up to $1,650 a year per student. The maximum Lifetime Learning Credit each year is $2,000 per family. Since the Hope Credit applies to students early in college, and the Lifetime applies to other students, a family with multiple children in college, or even parents in college, might be able to combine the two credits.
To qualify for either the full Hope or Lifetime Learning Credit, try to push your adjusted gross income below $45,000 if you are single or $90,000 if married. You can make use of the credit if you are single with an income up to $55,000, or married with an income up to $110,000, but you won't qualify for as much as if your income is lower.
Keep in mind that you might have some control over these figures because they are levels for tax purposes, not your actual compensation. Some simple methods to cut your taxable income would be to add money to a 401(k) or similar retirement fund at work or open a tax-deductible individual retirement account. You have until April 16 to fund the IRA, but 401(k) contributions must be completed by the end of the year.
When you contribute to a 401(k), you save money on your taxes that year, but the college tax credits help more.
"Anyone who is near the range where the credit is phased out, or who would otherwise receive a more generous education credit, should carefully review opportunities," Joseph Hurley, a certified public accountant and chief executive of SavingforCollege.com.
Also make sure you don't do something that forces your income higher for tax purposes. For example, be careful about selling a stock or mutual fund that is worth more than when you purchased it, because you will owe capital gains taxes.
(Selling investments that have been profitable also can reduce financial aid. Families that expect aid should avoid selling stocks, bonds and mutual funds during college. They should try to sell by Dec. 31 of their child's junior year in high school.)
For tax purposes, you can reduce, or eliminate, the impact of selling a profitable investment by selling another stock, bond, or mutual fund that has lost value since you purchased it.
You can also secure a tax deduction if you are paying off student loans for yourself, spouse or child. Although it doesn't cut your tax bill directly, like a credit, that's potentially a deduction of $2,500 from your taxable income, depending on how much interest you have paid in a year and your income. And you can combine the deduction with the Hope and Lifetime Learning Credits.
The benefit is phased out when your modified adjusted gross income is between $50,000 and $65,000 for singles and $105,000 and $135,000 for married people.
If you have been paying for a child to attend college and are too affluent to deduct interest on loans, consider having your child use the deduction. Students can't take the deduction, however, if their parents are claiming the child as a dependent.
Hurley suggests examining tax calculations to see which way is most advantageous: getting the deduction for college interest or for claiming a child as a dependent. For affluent families, he notes, parents may receive little advantage from claiming the child as a dependent. Yet a recent college graduate could get a large benefit from claiming education credits for the last year of college and the loan deductions.
Beyond trying to reduce your income to take advantage of college credits and student loan deductions, other strategies might maximize your tax advantages.
For example, you might want to delay, or speed up, when you will be paying tuition bills.
If your income allows you to qualify for the maximum Hope or Lifetime Learning Credits, but you haven't paid enough in tuition this year to receive the full credit, Hurley suggests prepaying some of next year's bills. The law lets you claim credit this year for expenses related to the first three months of next year.
On the other hand, if your income is too high this year to take full advantage of the credits, but next year appears to be a lower income year, Hurley suggests trying to delay payments for this year's tuition and fees.
The same might apply if your income is very low this year. You can receive credits only for taxes you have paid. So if your income is so low this year that you are barely paying any taxes, you could wait to pay tuition and fees until January. Then, if your income and taxes are higher next year, you might make fuller use of the tax credit. Of course, the strategy will work only if the college is willing to wait to receive its payment.
Besides timing your college bill payments, Hurley also suggests timing payments on student loans. Remember, the cap on student loan interest is $2,500, so if you are under that, you might be able to get a larger tax deduction by hurrying to pay your January student loan payment. Just make sure it clears before the end of December.
As you work on timing issues, pay particular attention to the Hope Credit, so you get the most from it, Hurley said. While the Lifetime Learning Credit applies to higher education at any point in your life, the Hope Credit is very specific. It applies to a student's first two years of college.
But Hurley points out that if you are clever, you can claim the credit for three years rather than two. That's because of when the tax year falls compared with when students actually attend college.
Remember, most students begin college in the fall, within a few months of the end of the tax year. So they might not complete their first two full years of college until the third tax year.
Keep in mind the rules that apply to the Hope Credit: You can get a refund for 100 percent of tuition up to $1,100, plus 50 percent for the next $1,100, or the $1,650 maximum per student per year, until the full second year of college is completed.
If you are falling short of tuition and fees to reach the maximum credit, and you have the right income levels, Hurley suggests adding a class to boost the fees. Also, keep in mind that you must be attending college at least half time to claim the Hope Credit, so adding a class might help you there.
This works in reverse too. If you are close to entering your junior year and would like to claim the Hope Credit for a third year, perhaps by dropping one class and saving it for the next year you will receive the full tax advantage. Of course, you can't base your educational choices just on taxes, but, all things being equal, the timing is worth consideration.
Also, when you get around to preparing your tax return, do not feel confined by the Hope Credit if a student is just two years into their education. If you are paying more than $8,250 a year for tuition, Hurley said, the Lifetime Learning Credit will give you a bigger tax break even if the student is in the first two years of college.
You can use the Lifetime Learning Credit year after year for higher education. To get the maximum per year credit of $2,000, tuition and fees would need to total $10,000 for the year.
Gail MarksJarvis is a Your Money columnist.Copyright © 2014, Los Angeles Times