OUR THOUGHTS ON:

Higher Education: So Many Costs, But Not All Qualify for Each of the Tax Benefit Programs

Higher Education|Tax

By Catherine Martz

With multiple credits/deductions/education savings programs available to those of us with children in college, it’s confusing to know which costs are considered to be qualified for each of these incentive programs.  The following represents an overview of some of the current programs, along with a summary of expenses that are considered to be qualified for each of them.  One caution though—while you may combine some credits, deductions or participation in qualified tuition programs, you can never use the same expenses for more than one of the incentive programs.  In other words, no “double dipping” allowed!

American Opportunity Credit (AOTC)

This is a tax credit, of which 40% is refundable.  AOTC may be used for the first four years of undergraduate studies and provides a credit up to $2,500 per student.  The qualified education expenses (QEE) include:  tuition and fees; and books, supplies, and equipment (when required for enrollment at an eligible education institution).  Note that room and board are not considered QEE.

Lifetime Learning Credit:

This credit is nonrefundable and is available for an unlimited number of years for both degree and non-degree programs.  The amount of this credit is up to $2,000 per year.  QEE include:  tuition and fees; and books, supplies and equipment (when paid directly to the eligible educational institution as a condition of enrollment).  Note that room and board are not considered QEE.

Tuition and Fees Deduction:

This is a deduction (not credit) of up to $4,000 per year.  QEE include:  tuition and fees; and books, supplies and equipment (when paid directly to the eligible educational institution as a condition of enrollment).  Note that room and board are not considered QEE.

Qualified Tuition Program:

These types of programs (also known as “tuition assistance programs” or “TAP529” accounts) allow nondeductible contributions that are able to earn tax-free interest/dividends when distributions are used for QEE.  QEE include:  tuition and fees; books, supplies and equipment (when required for enrollment at an eligible education institution); and room and board (if at least a half-time student).

Student Loan Interest Deduction:

This is a deduction of up to $2,500 of interest paid annually on student education debt.  QEE include:  tuition and fees; books, supplies, and equipment; room and board; and transportation.  All expenses must have been incurred while enrolled at least half-time in a degree program.

Some of the programs discussed above have adjusted gross income phase-out limitations, depending on filing status.  Those are beyond the scope of this article and may require further conversations between you and your tax provider.

Another important caveat, with the current tax reform discussions taking place in both the House and Senate, education tax incentives are likely to change in 2018.  It might make sense to accelerate expenses into 2017, so they may be paid and includible under the current higher education expense model.  As always, should you wish to discuss this matter further, please contact your Schneider Downs tax advisory team.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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