Some education benefits are available at the state income tax level. Since many states start the calculation of state taxable income based on federal adjusted gross income (AGI), the deduction for tuition and fees could reduce state taxable income and, therefore, state taxes, unless the state requires the amount to be added back for state income tax purposes.
If a student uses loan proceeds to pay qualified educational expenses, the student is eligible to claim an education credit or the deduction for educational expenses based on the amount of loan money used to pay these expenses
Interest earned on U.S. government savings bonds used for higher educational expenses is exempt from federal taxation. While the interest rates on these investments are low, these bonds are also exempt from state income taxes.
Most states offer a deduction in calculating state income taxes for contributions to that state’s Sec. 529 plan. A few states offer a credit instead of a deduction (see tinyurl/ctum3fy).
Tax benefits that help families bear the high and growing cost of higher education include deductions and credits, as well as tax-favored savings plans.
It is usually beneficial for the tax liability of the family as a whole for a child in college to be claimed by his or her parents as a dependent. Families should review the tests for qualifying children who are full-time college students.
Payments of student loan interest of up to $2,500 per year are deductible above the line, as are up to $4,000 in qualified tuition and fees. Both deductions are subject to modified adjusted gross income phaseouts.
In most cases, however, the American opportunity tax credit and/or the lifetime learning credit will yield a higher tax benefit for qualified educational expenses. Notably, eligible expenses for the American opportunity credit include required course materials such as books and supplies.
If families have a Sec. 529 or Coverdell education savings account, they should consider using distributions to cover college room and board, which are not eligible expenses for purposes of the credits or deduction.
) is an associate professor of accounting at the University of New Orleans. John W. Briggs () is an associate professor of accounting at James Madison University in Harrisonburg, Va.
To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at or 919-402-4434.
Help clients form a strategy from the Code’s array of options.
As parents online payday IN plan for their children’s higher education, they may choose from an array of tax-favored savings vehicles and deductions and credits. Options include education savings plans, education credits, deduction of educational expenses, education savings bonds, education loans and other alternatives. No single option works best for everyone, but by reviewing the pros and cons of each alternative, families can choose a strategy that best meets their needs.
Since planning for college education should start when children are young, CPA tax practitioners should offer these services to new parents as well as those with children currently in college. Yearly tax organizers should include questions about tax planning for college. When conducting yearend tax planning for parents of college students, CPAs should discuss related issues, including the dependency exemption on parents’ returns during their children’s college years.
As the need for a college degree has increased, the cost of going to college has also increased. According to The College Board, for the 20112012 academic year, the average annual in-state tuition and fees at a public four-year college are $8,244, and the average total out-of-state tuition and fees are $20,770. The average annual tuition and fees at private nonprofit colleges are $28,500 (tinyurl/45joe2). These costs do not include room and board, books or supplies. According to The Project on Student Debt, the average college senior graduating in 2010 owed $25,250 in student loans (tinyurl/4yv5t7z). Families therefore have good reason to start saving toward these costs while their children are young. Savings vehicles include Sec. 529 plans, education savings bonds and Coverdell education savings accounts (Coverdell ESAs). All of these plans have their merits. (See the SEC’s overview of Sec. 529 plans at tinyurl/d8ojwwg.) Families without savings can still take advantage of the following tax incentives once their children are in college.
