Going Back to College? What Tax Implications are Worth Considering? 

Going back to school is an investment in your future, so congratulations on working towards your college degree, or helping a family member achieve this goal. Education expenses have grown to record highs and if you’re experiencing sticker shock, you’re not alone. Saving money by being aware of important tax implications will help you out financially as you embark on furthering your education. Whether you’re a full-time student or a working professional returning to campus, being aware of tax credits, deductions, and benefits can help you save money.

Tax Credits 

There are two tax credits worth considering. An education tax credit will help you with the cost of your college expenses by reducing the amount of tax owed on your tax return. If the credit reduces your tax to less than zero, you may get a refund. 

Two education credits are available

1. American Opportunity Tax Credit (AOTC)

– Available to eligible students for the first four years of higher education.
– Covers up to $2,500 of the cost of tuition, fees, and course materials.
– The credit is 100% of the first $2,000 of qualified expenses and 25% of the next $2,000.
– 40% of the credit is refundable, meaning you can get up to $1,000 back even if you owe no tax.

2. Lifetime Learning Credit (LLC): 
– Ideal for graduate students or those taking courses to improve job skills.
– Offers up to $2,000 per tax return for qualified education expenses.
– There is no limit on the number of years you can claim the credit.

There are several differences and some similarities between the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).  You can claim these two benefits on the same return but not for the same student or the same qualified expenses. Be certain to speak with us at Adams Accounting Solutions to ensure you have the proper forms for these credits, and that you are meeting all the IRS requirements. 

Deductions

1. Tuition and Fees Deduction: 
This deduction allows you to reduce your taxable income by up to $4,000 for qualified education expenses. So, what are qualified education expenses? 

IRS.gov states that tuition, fees, books, computers, software, supplies, and other related expenses required by the educational institution are deductible.  However, room and board are not deductible. 

2. Student Loan Interest Deduction

Happily, you can deduct your interest expenses on eligible student loans, with a $2,500 maximum. So, which loans are eligible? 

According to IRS.gov, an eligible loan is a student loan you took out solely to pay qualified higher education expenses for you, your spouse, or your dependent. 

The interest you can deduct includes both required and voluntarily prepaid interest payments. You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year. The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status. This limit changes from year to year, so be sure to consult with us at Adams Accounting Solutions to understand the current law. 

Additional Considerations

1. Scholarships and Grants:
– Scholarships and grants are generally tax-free if used for qualified education expenses such as tuition and fees.
– Any portion used for non-qualified expenses, like room and board, is taxable.

2. Employer Assistance Programs:
– Up to $5,250 of employer-provided educational assistance can be excluded from your taxable income.
– This applies to both undergraduate and graduate courses.

3. Education Savings Accounts (ESA) and 529 Plans:
– Contributions to an ESA or 529 Plan are not deductible, but earnings grow tax-free.
– Distributions are tax-free if used for qualified education expenses.
– Qualified expenses include tuition, fees, books, and even room and board.

Record Keeping and Filing

Don’t forget to maintain accurate records of your education-related expenses and any financial aid received. Forms needed include:

Form 1098-T: This form is provided by your educational institution, and details tuition payments received and billed.
Form 1098-E: This form is provided by your loan company, and it details interest you paid on student loans.

If this seems mind-boggling—it is. But don’t fret! The professionals at Adams Accounting Solutions are here for you. We’re just a phone call away. To help you with complex tax laws and changing rules, just contact our friendly professionals in the office to assist you in maximizing your benefits when it comes to college expenses, and to help ensure you’re complying with IRS rules. 

Conclusion

Understanding the tax implications of returning to school can provide significant financial benefits. By utilizing available tax credits, deductions, and benefits, students, parents, and working professionals can ease the financial burden of further education. Stay informed, keep meticulous records, and consult with us at Adams Accounting Solutions to make the most of your educational investment.

Reference: https://www.irs.gov/credits-deductions/individuals/education-credits-aotc-llc