As students begin a new school year, parents and self-financed students are facing growing tuition costs, as well as other education-related costs. To alleviate some of the pain associated with ever-increasing costs of schooling, Congress has seen fit to provide within the Internal Revenue Code certain tax initiatives that could serve to defray some of those costs.
On August 18th, the Internal Revenue Service issued Information Release 2015-102, providing back-to-school reminders for parents and students about education-related tax benefits, including the two currently-available college tax credits. In general, the American Opportunity Tax Credit and/or Lifetime Learning Credit are available to taxpayers who pay qualifying expenses for an eligible student.
Eligible students include the taxpayer, spouse and dependents. The American Opportunity Tax Credit provides a credit for each eligible student, while the Lifetime Learning Credit provides a maximum credit per tax return. Although a taxpayer may qualify for both of these credits, only one can be claimed per student/per year. To claim these credits, the taxpayer must file Form 1040 U.S. Individual Income Tax Return or 1040A U.S. Individual Income Tax Return [Short Form] and complete Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).
The credits apply to eligible students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. The credits are subject to income limits that could reduce the credit amount allowed on their tax return. Also, eligible parents and students can get the benefit of these credits during the year by filling out a new Form W-4, Employee’s Withholding Allowance Certificate, claiming additional withholding allowances, and providing it to their employer.
Also note that the Internal Revenue Code also provides a variety of other education-related tax benefits including:
- Scholarship and fellowship grants are generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
- Student loan interest deduction of up to $2,500 per year.
- Interest on savings bonds used to pay for college can be tax free in certain circumstances; income limits apply, and the bonds must have been purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
- Qualified tuition programs, also called 529 plans, are used by many families to prepay or save for a child’s college education.
In addition, taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the Earned Income Tax Credit.
Obviously, planning for payment of an education is a daunting task and one which requires consideration of many different facets of financing to attain that objective. The federal tax benefits allowed under the law should be considered as important elements of that planning and where available, both parents and self funding students should take advantage.
Should you have questions regarding these provisions and qualifying requirements, please contact Bob Grossman at 412.338.9300.