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TAX TALK: Maximizing Your Education-Related Tax Breaks

Posted by Hal Zemel, CPA, J.D., LL.M. on Feb 22, 2016 7:00:00 AM
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If there was a college student in your family last year, you may be eligible for some valuable tax breaks on your 2015 tax return. To max out your education-related breaks, you need to determine which ones you’re eligible for and then claim the one(s) that will provide the greatest benefit. In most cases you can take only one break per student, and, for some breaks, only one per tax return.

Credits vs. deductions
Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed. Two credits are available for higher education expenses:

  1. The American Opportunity credit –
    1. Provides up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education,
    2. Begins to phase-out at modified adjusted gross income (“MAGI”) of $80,000 ($160,000 joint returns) and is fully phased-out at MAGI of $90,000 ($180,000 joint returns),
    3. Allows up to 40% of the credit to be refundable (i.e. allowed even if you have no tax liability to reduce); and
  2. The Lifetime Learning credit –
    1. Provides up to $2,000 per tax return for post-secondary education expenses, even beyond the first four years,
    2. Does not require that student be enrolled in a degree program or attending classes on at least a half-time basis,
    3. Begins to phase-out at MAGI $40,000 ($80,000 joint returns) and is fully phased-out at MAGI of $50,000 ($100,000 joint returns),
    4. Is non-refundable (i.e. you can only use the credit against your federal tax liability).

It is important to note that there are several other tax benefits applicable to higher education expenses. These include the deduction of interest on student loans, tax-free distributions from a Coverdell education savings account (Coverdell ESA or ESA), early withdrawals from traditional and Roth IRAs, state tuition programs (QTPs or Code Sec. 529 plans), exclusion of interest from U.S. Saving bonds used to pay qualified educational expenses, employer education assistance programs, and the deduction for higher education expenses. No double benefits are allowed, so if you claim a deduction for higher education expenses on your tax return, you cannot claim a credit for the same expenses.

How much can your family save?
Keep in mind that even if you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however. To learn which breaks your family might be eligible for on your 2015 tax returns — and which will provide the greatest tax savings — please contact me at hzemel@berdonllp.com or your Berdon advisor.

Hal Zemel, a Tax Principal at Berdon LLP, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.

Topics: TAX TALK

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