Month: August 2016

The cost of education keeps going up faster than the rate of inflation, but Congress has created tax breaks to help with education expenses.

American Opportunity Tax Credit (AOTC). 

This can be worth up to $2,500 per student.

The amount of the Hope credit is 100% of the first $1,200 of education costs plus 50% of the next $1,200.

Limitations…

• The credit is available only for the first two years of postsecondary education per student.
• The student must be pursuing a degree or other recognized education credential and be enrolled at least half-time.
• The credit is phased out as your modified adjusted gross income (MAGI) rises from $80,000 to $90,000 on a single return, and from $160,000 to $180,000 on a joint return.
• Up to 40% of the credit is refundable.  It can generate a refund greater than the amount of payments you made.

Lifetime Learning Credit. 

This can be as much as $2,000 per tax return.

• The credit equals 20% of the first $10,000 of education expenses (maximum credit per taxpayer regardless of the number of students).
• The credit may be claimed for a student for any number of years.
• The student need not be pursuing a degree and may be taking only one course.

Credit planning: 

The AOTC credit and Lifetime Leaning credit can’t both be claimed for the same student in the same year, but both can be claimed on the same return for different students (such as a child in college and a parent taking a work-related course).

Student-loan interest deduction. 

This is available for up to $2,500 of loan interest even for those who don’t itemize deductions on their tax returns.  Loan origination fees are deductible, too.

 Snag: Those who don’t itemize often overlook this deduction.

The deduction is available for interest on a loan used to finance tuition, fees, room and board, books, equipment, and other necessary expenses (such as transportation) at virtually all accredited postsecondary and vocational schools.

Limit: The deduction is phased out as MAGI increase from $65,000 to $80,000 on a single return and from $130,000 to $160,000 on a joint return.

Coverdell Education Savings Accounts (ESAs).

Can receive up to $2,000 per year for any single beneficiary under age 18.  ESAs earn tax-deferred investment returns which can be used tax free to pay education expenses.

Advantage: ESAs can be used to pay for elementary through high school, not just college.

To contribute to an ESA, one must have MAGI not exceeding $110,000 on single returns or $220,000 for married filing jointly.  Anyone can contribute to an ESA for an individual, so if parents are unable to, a friend or other relative may contribute.

Qualified tuition programs (Section 529 plans). 

These plans can hold funds that earn tax-deferred investment returns which can be spent tax free on college education costs.  Or they can be prepaid tuition plans allowing a person to buy tuition now at today’s prices.

Advantage: These plans can hold far more than ESAs and therefore can be used for estate planning.  Yet a person who contributes funds to the plan can withdraw them in case of need – a unique instance of being able to “keep while giving away” under the Tax Code.

 Tax-free scholarships, fellowships, and need-based grants. 

These forms of aid generally are tax free when funds received are applied to tuition, fees and required course-related expenses (such as books, supplies, and equipment).

 Beware: Funds applied to the cost of room and board, travel, or research are taxable.