Students will soon be heading back to school, and with skyrocketing education costs, families are increasingly exploring ways to cut costs and save money. With that in mind, in this Alert, we summarize what many consider the easiest attainable tax deductions and tax credits involving education-related expenses. We also highlight a few items commonly mistaken as permissible tax deductions.
The American Opportunity Tax Credit – This credit modified the existing Hope Credit, and can amount to $2,500 in tax credits on the first $4,000 (100 percent of the first $2,000 of qualified tuition and related expenses, and 25 percent of the next $2,000) of qualified tuition and related expenses of qualified educational expenses per eligible student. This is available for the first four years of post-secondary education at a qualified education institution. Up to 40 percent of the credit is refundable, which means that taxpayers may be able to receive up to $1,000, even if they have no tax liability. Eligible expenses include tuition at an eligible institution, books and required supplies and course materials, but not room and board, medical expenses, or insurance. The credit is phased out for single taxpayers with modified adjusted gross income (MAGI) between $80,000 to $90,000 and for joint filers with MAGI between $160,000 to $180,000.
The Lifetime Learning Credit – This credit may be worth up to $2,000 for qualified education expenses incurred for a student enrolled in an eligible educational institution. The credit is nonrefundable and amounts to 20 percent of the first $10,000 in qualified education expenses. There is currently no limit on the number of years a taxpayer can claim the Lifetime Learning Credit for an eligible student, and the student does not have to be in the first four years of higher education. For 2014, the credit is phased out for single taxpayers with MAGI between $54,000 to $64,000 and for joint filers with MAGI between $108,000 to $128,000.
Dependent Care Credit – Although not directly an education-related tax benefit, if both spouses are employed, or actively seeking employment, a credit is available for 20 percent to 35 percent of qualifying expenses, up to $3,000 for one qualifying child or $6,000 for two or more qualifying children. Qualifying children are those who are dependents and under 13 years of age when the care was provided. Children's movies and cable TV bills are not qualifying expenses.
Student Loan Interest – Eligible taxpayers may deduct student loan interest of up to $2,500 for interest paid on education loans. The person whose name is on the loan document, and in whose name the Form 1099 is issued, is the person legally obligated to make the loan payments, and therefore, the person entitled to the student loan interest deduction. Beware that if the student is legally obligated to pay the interest, and the parent actually pays the interest and claims the student as a dependent on the parent's tax return, neither may claim the deduction. The amount of the student loan interest deduction is phased out for 2014 for single taxpayers with MAGI between $65,000 and $80,000 and for joint filers with MAGI between $130,000 and $160,000.
Tuition and Fee Deduction – Taxpayers may deduct higher education tuition and fee expenses required as a condition for enrollment or entrance for eligible students, including costs incurred for themselves, their spouses or dependents. The maximum deduction is $4,000 and phases out for single taxpayers with MAGI of $65,000 and for joint filers with MAGI of $130,000. The deduction is available for any person who paid tuition and college entrance or enrollment fees and can be claimed each year these expenses are incurred.
School Fundraisers – Tax deductions for fundraising activities are limited and must be reduced by the market value of goods or services received for the contribution. See our previous Alert on maximizing charitable contributions here.
529 Education Funding Plans – The earnings in 529 plans are not taxable for federal purposes. Plan funds accumulate tax-free and withdrawals are not taxable provided they are for qualified education expenses. Although no annual contribution limits exist, a 529 plan must not allow contributions in excess of those needed to cover qualified higher education expenses. Qualified education expenses include books and computers at the elementary, high school and college levels.
Items Commonly Mistaken as Tax Deductible Expenses
School Uniforms – Not deductible, even if required by the educational institution.
Parochial or Private School Tuition – Not deductible, and cannot be grouped with the type of deductible care allowable when both parents are employed as discussed above.
Higher Education Moving Expenses – Since these expenses are not related to the procurement of new employment, expenses incurred in moving a student into college are not deductible.
For Further Information
If you would like more information about this topic or your own unique situation, please contact any of the practitioners in the Tax Accounting Group. For information about other pertinent tax topics, please visit our publications page located here.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.