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Good morning. This is Medora Lee with your Daily Money, Sunday Tax Edition.
On Sundays from today until April 15, we’ll take you through what’s new and what’s new in the 2024 tax season.
In today’s edition, we’ll talk about how you can turn your health and education expenses into tax savings.
Health care costs
There are two accounts you can put money into to pay for your health care needs: a flexible spending account (FSA) and a health savings account (HSA). You use pre-tax money to fund these accounts, up to a certain limit, and any qualified withdrawal to pay a medical expense is tax-free.
An HSA is more flexible because money can be invested for growth and unused money rolls over indefinitely. However, you can only use an HSA if you have a high-deductible health plan. For 2023, the maximum HSA contribution is $3,850 for an individual and $7,750 for a family, but participants 55 and older can contribute an additional $1,000. That means an older married couple can contribute $8,750, all before tax.
An FSA is a use-it-or-lose-it account. You usually have one year to spend all the money in the eligible care account or lose it—unless your employer offers an exception. The good news is that the list of things you can use the money for has grown over the years to include even everyday items like Tylenol, sunscreen, menstrual care, contact lenses and glasses, massage guns, breast pumps and other. For 2023, participants can contribute up to a maximum of $3,050.
Read more about HSA contribution limits and FSA spending limits.
Education expenses
Education is expensive, but the government offers several ways to soften the blow.
Student loan interest deduction: If you paid off a student loan, you can deduct up to $2,500 of the interest.
American Opportunity Tax Credit: The AOTC can reduce the amount you owe in taxes by up to $2,500, depending on your (or your parents’) income, per student. In some cases, the credit can be returned. If the credit brings you to $0 you owe the IRS, you can get a refund of up to 40% of the remaining amount, up to a maximum of $1,000. The AOTC gives you a credit for 100% of the first $1,000 of qualified education expenses. Then you get a credit for 25% of the next $2,000 of qualified education expenses. Qualifying expenses include tuition, fees, and required course materials (such as textbooks).
Lifelong Learning Tax Credit: With the LLTC, you can claim a credit for 20% of up to $10,000 spent on qualified tuition and educational expenses paid for eligible students enrolled in a qualified college or educational institution. There is no limit to how many years you can claim the credit, making it especially useful for students in graduate school, continuing education programs, or those completing certificate programs. However, unlike the AOTC, it costs up to $2,000 per tax return – not per student – and is non-refundable.
529 plans: You can fund these investment plans every year up to a limit while your child is still young. You use after-tax money, but some states (each state has its own plans and rules) offer a state tax break on contributions. When you’re ready to use the money for qualified educational expenses like tuition, books, school supplies, and room and board, withdrawals are tax-free.
Read more about these tax saving ideas.
About everyday money
This was a special Sunday tax edition of The Daily Money. Every weekday, The Daily Money delivers the best consumer news from USA TODAY. We break down the financial news and provide the TLDR version: how decisions by the Federal Reserve, the government and companies affect you.