Its Back to School, what better time to think about tax deductions for school.
Education Tax Credits
Lifetime Learning credits or the Tuition and Fees Deduction are available for taxpayers enrolled in a college or university.
Under the Lifetime Learning Credit, taxpayers can claim qualified tuition and related expenses they’ve had at eligible educational institutions. A taxpayer can claim a tax credit equal to 20% of the first $10,000 paid for tuition, required fees, and certain other expenses during the calendar year.
Under the American Opportunity Tax Credit, student taxpayers can reduce their amount of tax owed as long as they are paying for tuition, supplies, and fees to an eligible educational institution. The student must be working towards a degree in order to qualify. The IRS will send the student a refund check for about 40% of the credits they qualify for.
Taxpayers cannot claim either deduction if their filing status is married filing separately or if another person can claim an exemption for them as a dependent on his or her tax return. This deduction phases out at higher income levels.
Before the 2017 tax year, if a student taxpayer didn’t qualify for either of the above credits, they were able to claim the “tuition & fees deduction” for qualified educational expenses. This deduction is available for qualifying expenses paid during the tax year in connection with enrollment during the year or any academic term. This deduction can be worth up to $4,000 whether or not the taxpayer itemizes their tax deductions. Unfortunately, Congress did not renew this deduction for the 2017 tax year so taxpayers cannot use it on their 2017 returns. If your clients still haven’t submitted their 2016 return, they may claim it on that return.
Back-to-school time also means the start of a new job for many recent college grads. If your client recently graduated and is paying the interest on their student loans, they will qualify for the student loan interest deduction. Their school will send them a 1098-E that will show how much interest they paid in the year. To deduct student loan interest, they will write the total of their interest paid (subject to a $2,500 annual limit) on the Student Loan Interest deduction line on Form 1040 or Form 1040A. They will be able to subtract that interest paid from their total earnings as an adjustment so they will have a lower adjusted gross income.
A 529 plan is a savings plan derived from Section 529 of the Internal Revenue Code (IRC). A 529 plan is an account used to pay for qualified higher education expenses such as tuition, fees, books, etc. This investment account can yield returns and also has tax advantages. For example, withdrawals from a 529 aren’t subject to federal taxes as long as they are used for college-related expenses. Each 529 plan is sponsored by a state so details of the plan will differ depending on the state.
Coverdell Education Savings Account
A Coverdell savings account is another type of educational savings account for students. If a taxpayer’s modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), they may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. Qualified education expenses include college expenses and certain elementary and secondary school expenses. Taxpayers can open both a Coverdell ESA and a 529 account. If a withdrawal is made from either or both accounts, the qualified educational expenses will need to be allocated appropriately for the beneficiary.
Back-to-school season can be stressful for parents and students alike. Review these tax savings tips and help your clients transition back into school with ease.
Author: Nushin Zarrabi