Are you still asking "Can I expense this...?" Use our free tool!
College is expensive and the tax code provides multiple tools to make it less painful: 529 plans for tax-free growth, education tax credits for current-year savings, the new SECURE 2.0 529-to-Roth rollover for unused funds, and the student loan interest deduction for repayment years. Here is the 2026 framework for working parents and small business owners planning college costs for their kids.
Three main vehicles:
For most Texas families with college-age planning, a 529 plan is the primary vehicle. The Texas 529 program (Texas Tuition Promise Fund + Texas College Savings Plan) provides multiple options. Contributions are made with after-tax dollars (Texas has no state income tax to offset against).
A 529 plan lets you contribute after-tax money into investment accounts where the growth is tax-free as long as withdrawals are used for qualified education expenses.
Qualified expenses include tuition, fees, books, supplies, computers, and room and board for higher education (eligible institutions). Under recent law, 529 funds can also be used for K-12 tuition up to $10,000/year, apprenticeship costs, and up to $10,000 lifetime in student loan repayment per beneficiary.
Contribution limits vary by state but are generally very high — most plans allow $300,000-$500,000+ per beneficiary lifetime. Annual gift exclusion ($19,000 per person per year in 2025) lets one contributor frontload 5 years of contributions ($95,000 single, $190,000 couple) into a single year without gift tax consequences.
Federal: contributions are NOT deductible on federal income tax. State: most states offer a state-level deduction or credit for contributions to that state’s 529 plan. Texas has no state income tax, so Texas residents don’t get a state-level benefit but still capture the federal tax-free growth.
Some states (New York, Illinois, Michigan, others) offer state tax deductions even for contributions to other states’ 529 plans (matching state plans). The decision of which state’s plan to use turns on investment options, fees, and any state-tax benefit. For Texas residents, the choice is purely about plan quality.
Historically, 529 over-funding was a real risk — if the beneficiary didn’t use all the money for education, withdrawals for non-education expenses faced both a 10% penalty AND ordinary income tax on the growth. Families with children who didn’t attend college or earned scholarships could end up with stranded 529 balances.
SECURE 2.0 (effective 2024) introduced a 529-to-Roth-IRA rollover. Unused 529 funds can be rolled into a Roth IRA for the beneficiary, subject to: $35,000 lifetime rollover cap, account must have been open at least 15 years, contributions made in the last 5 years are not eligible for rollover, annual Roth IRA contribution limits apply ($7,000 in 2025).
This effectively makes 529 over-funding less risky — extra balances can convert to retirement savings instead of being penalized. Families can be more aggressive with 529 funding decisions.
Two main credits, you can claim ONE per student per year:
For working parents paying college tuition for a child: AOTC wins for the first 4 years (higher credit, partly refundable). LLC wins for years 5+ (graduate school) or for the parent’s own continuing education.
Yes. Up to $2,500 of student loan interest per year as an above-the-line deduction on Form 1040. The loan must have been for qualified higher education expenses for yourself, spouse, or dependent at the time the debt was incurred.
Phase-out: $80K-$95K single / $165K-$195K MFJ in 2025. The deduction works even if you take the standard deduction (above-the-line, not itemized). Parents who took loans for their child’s education and continue paying them can deduct.
If you refinanced a student loan into a non-student-loan product (e.g., home equity loan), the interest typically loses qualification. Keep the loan in its student-loan form to preserve the deduction.
Five high-leverage moves:
For most Texas families with college-age planning, the 529 + AOTC combo handles the bulk of the federal benefits. Anything beyond that is optimization. Let’s model your specific situation if you want to estimate total federal tax savings on a college plan.
Until next time.
A 529 plan is a tax-advantaged college savings account. Contributions grow tax-free, and qualified withdrawals (tuition, room and board, books, computers, K-12 tuition up to $10,000/year, student loan repayment up to $10,000 lifetime) are tax-free. Most states offer a state-level tax deduction or credit on contributions. The federal benefit is the tax-free growth — over 18 years, this often doubles or triples what would have accumulated in a taxable account.
The American Opportunity Tax Credit (AOTC) phases out for modified AGI between $80,000-$90,000 (single) / $160,000-$180,000 (MFJ) in 2025. Below the phase-out, you can claim up to $2,500 per student for the first 4 years of higher education (100% of first $2,000 + 25% of next $2,000). 40% of the credit is refundable. Cannot claim AOTC and Lifetime Learning Credit for the same student in the same year.
Yes, under SECURE 2.0 (effective 2024), unused 529 funds can be rolled into a Roth IRA for the beneficiary. Limits: $35,000 lifetime rollover, account must have been open 15+ years, contributions made in the last 5 years are not eligible, annual Roth IRA contribution limits apply ($7,000 in 2025). This addresses the historic risk of over-funding a 529 — leftover money no longer faces the 10% penalty + ordinary income tax on growth.
Yes, up to $2,500 of student loan interest per year as an above-the-line deduction on Form 1040 (not as an itemized deduction). Phase-out at modified AGI $80,000-$95,000 (single) / $165,000-$195,000 (MFJ) in 2025. The loan must have been for qualified higher education expenses for yourself, spouse, or dependent at the time the debt was incurred. Parents who took loans for a child’s education and continue paying them can deduct.
Coverdell ESAs allow up to $2,000 per beneficiary per year (vs much higher 529 limits). Growth is tax-free. Coverdells offer broader investment options than most 529s but the low contribution cap limits accumulation. For most families, a 529 is the primary vehicle and Coverdells are supplementary. Coverdells phase out at modified AGI $95,000-$110,000 (single) / $190,000-$220,000 (MFJ).
Adam Traywick, CPA is the President and founding CPA of Adam Traywick, LLC, a Fort Worth small-business accounting firm. He has over 20 years of experience helping small business owners across home-services trades, hair salons, real estate, and insurance agencies optimize taxes, run cleaner books, and avoid the surprises that come from once-a-year accountants.
