Tax Tip of the Week | No. 344 | Tax Breaks for College Students

Tax Tip of the Week | March 2, 2016 | No. 344 | Tax Breaks for College Students

If you are attending college, or have a college student in your household, the following is a brief summary of the various education credits and deductions that may be taken on your tax return:American Opportunity Tax Credit: This is a very generous tax break that could even include a refundable credit.  It is only available for the first four years of undergraduate enrollment in a qualified higher education facility.  The maximum credit could be up to $2,500.Lifetime Learning Credit:  If you cannot claim the American Opportunity Credit, you may qualify for this credit.  This credit, up to $2,000 is not refundable, and is available for qualified education expenses for almost anyone.Tuition and Fees Deduction:  This deduction is an alternative choice you can make vs. using either of the education credits. You always need to consider each of these tax-breaks before choosing which offers the greatest tax savings.  This deduction is an “above the line” deduction which means it can also help reduce your Ohio tax liability.Qualified Tuition Programs (QTPs or 529 Plans):  If you invested money into one of these programs for your student, you know that you did not receive any federal tax savings on those contributions.  Now is the time to reap the rewards for those savings! Distributions from these plans is now tax free if used on qualified expenses.IRA Distributions:  Generally speaking, if you take money out of an IRA before reaching age 59.5 you will pay a 10% penalty in addition to tax on the distributed amount.  There is an exception, however, on the penalty if the distribution is used for education expenses. You will still pay tax on the distributed amount.  Be careful on this one—give us a call before trying!Education Savings Bond Program:  If you own U.S. Savings Bonds you have the choice of paying taxes on the interest as it is earned or paying tax on the full amount of interest when the bond is cashed.  If the bond is cashed to pay qualified education expenses on a dependent, the interest may be excludable from income.Scholarships and Grants:  A scholarship or grant that a student receives is usually excluded from income. The amounts received, however, need to be offset against the qualified expenses used to calculate one of the credits/deductions we discussed above. Example; if a student gets a “free ride scholarship” they would probably not qualify for any of the credits/deductions we outlined.Student Loan Interest Deduction:  When a student needs to start paying off any student loans taken, the interest they pay can be tax deductible up to 2,500 per year.Please note:  All of these credits and deductions are limited by AGI.  If your income is too high, you may not qualify for any tax breaks.  Use of these education incentives takes some careful tax planning.You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.Rick Prewitt – the guy behind TTW...until next week.