Tax Tips for Back to School
Students are back in the classroom and routines are being reestablished. While the kiddos work on their education, it seems like a good time to increase the knowledge base of parents about the variety of education related tax breaks and deductions.
Private school costs
Private school tuition does not itself yield any tax benefits. Nor is the cost of school uniforms deductible, even if they are mandatory. However, if there is a child care component involved in the private school tuition, such may qualify for a tax credit for children under age 13, as explained next.
Before and after school care can be deducted
If you have children under age 13, expenses to provide care before or after school care may qualify for a child care tax credit if they are a qualifying expense that enables the parent(s) to work.
Tax deductions for school fundraisers
If you donate to a school, you may have a charitable contribution deduction. However, if you receive something in return, you must reduce your deduction by the value of any goods or services received. Sorry, but that cookie dough you bought isn't deductible!
Moving expenses to attend college
Heading off to college is not moving for a job (although it may seem like it to the student) and, therefore, does not qualify for the moving expense deduction. However, expenses incurred to move from college for that first job may be eligible.
Use of tax-deferred accounts to pay for educational expenses
You can use certain tax-deferred accounts to pay for qualified educational expenses. Depending on the type of account, qualified expenses may include not just those for college, but also for elementary and high school.
The types of tax-deferred accounts that provide education benefits include a Coverdell Educational Savings Account, as well as a Section 529 Plan account. These are very different, with different contribution limits, investment options and expenses that are considered "qualified”, among other things.
A discussion of all the differences is beyond the scope of this article, but you can generate a handy side-by-side comparison chart by going to http://www.savingforcollege.com/compare_savings-options and checking the appropriate boxes.
One advantage of a section 529 plan that won't be shown there is that in Arkansas, a deduction of up to $5,000 per taxpayer is also available for state income tax purpose for contributions made to Arkansas sponsored plans.
Student loan interest paid
Student loan interest is generally deductible as an above the line deduction, meaning you do not have to itemize in order to claim it on your return. Student loan interest may be deductible up to $2,500. The amount of the student loan interest deduction is gradually reduced if the taxpayer's modified adjusted gross income is within a certain range.
There are also several tax benefits related specifically to expenses for higher education.
American Opportunity Credit (AOC)
The AOC can amount to $2,500 in tax credits per eligible student and is available for the first four years of post-secondary education at a qualified education institution. Up to 40% of the credit is refundable, which means that the taxpayer may be able to receive up to $1,000, even if the taxpayer has no tax liability.
Qualified expenses include tuition at an eligible institution, books and required supplies, but not room and board, medical expenses, insurance, etc. Some income limits also apply.
Further, you are required to have a Form 1098-T from the educational institution to take the AOC, and the credit is be based on amount PAID during the year, not the amount billed to you.
Lifetime Learning Credit (LLC)
A LLC up to a maximum of $2,000 credit per year may be taken for qualified education expenses paid for a student enrolled in an eligible educational institution. The credit is 20% of a maximum of $10,000 in qualified education expenses.
Unlike the AOC, this credit is a nonrefundable credit, meaning it can only be used to reduce an actual tax liability. However, there is also no limit on the number of years a taxpayer can claim this credit. Income limits apply for the LLC as well, and this credit is generally applied only to tuition and fees.
Tuition and Fees Deduction
The Tuition and Fees Deduction is an above the line deduction and applies to qualified education expenses for higher education for an eligible student taking undergraduate, graduate or post graduate courses. The deduction gradually phases out after a certain income level, but there is no limit to the number of years the deduction can be claimed.
