tax savings for college
Tax Savings From College
by Howard Freedman
Copyright 2024 Financial Aid Consulting. All rights reserved. No portion of this article may be reproduced mechanically, electronically, by photocopying, or by any other means without expressed written permission of the author. Howard can be reached at finaidguy@gmail.com or 781-341-0234
Check with Your Tax preparer or the IRS about the latest status of this benefit.
One of the best financial rewards for attending college is the IRS's tax breaks for students attending qualified educational institutions. Unfortunately, many families may overlook these programs because important tax information is normally sent to the student in their college portal.
This common oversight can be avoided when you understand what to do when you receive Form 1098-T: Tuition Payments Statement. It is the information return that colleges and universities are required to issue for a student's eligibility for the American Opportunity and Lifetime Learning credits. These and other education credits are explained in IRS Publication 970, Tax Benefits for Education, available online at www.irs.gov.
Most accredited public, nonprofit, and private postsecondary institutions such as colleges, universities, vocational schools, or other post-secondary educational institutions must file Form 1098-T for qualified tuition and related expenses. Expenses can be reported as the amount received or billed for qualified tuition and related educational expenses from any source during the calendar year.
The 1098-T is either mailed or electronically sent to each student as well as the IRS. Unlike a W-2, this is an informational return that reports qualified expenses and other information for determining whether the taxpayer qualifies for these credits and does not have to be submitted with the taxpayer’s federal income tax return.
Students should be sensitive to the importance of Form 1098T as much as they are for receiving their W-2. They should contact their financial aid office to find out how to get a duplicate copy if they have yet to receive one by the end of January. Delivery problems can occur if the student’s address or e-mail accounts are not up to date.
Form 1098 T reports qualified expenses regardless of whether they were paid in cash, loans, etc. In other words, the student was charged this for the qualified education expenses. Explanations of this other information are on the back of this form.
If this is so simple, how can there be any problems?
Although the rules are well explained, beware of the following trouble spots.
The parents who claim the credit for themselves, a spouse, or the student they claim as their dependent and take tax exemption can claim the credit even if the student did not contribute to their education.
• A student can claim the tax credit if they take the tax exemption and are not taken as a dependent on their parent's tax return.
• Families should determine the economic tax advantages and consult with a tax professional when determining who should take the tax exemption.
• Parents cannot take the credit if their filing status is married filing separately
• Taxpayers can file amended tax returns to recapture these credits per IRS regulations that apply to the years they could have taken.
The American Opportunity Credit Act allows up to a $2500 tax credit per eligible student to reduce the amount of income tax paid. This credit reduces taxes, unlike a deduction that reduces the amount of income subject to this tax. The tax credit is available for only four tax years per eligible student pursuing an undergraduate degree or other recognized educational credential. The student must be enrolled at least half-time for at least one academic period that begins during the tax year. Qualified expenses are tuition and fees required for enrollment. Course-related books, supplies, and equipment do not need to be purchased from the institution to qualify. There can be no felony or drug convictions on a student’s record. This deduction is subject to income limits described in Publication 970
The Lifetime Learning Credit allows up to a $2500 tax credit per return to reduce the income tax paid. The tax credit is available for an unlimited number of years. The student does not need to be pursuing a degree or other recognized education credential and may take one or more courses. Course-related books, supplies, and equipment paid to the institution qualify. Students with felony drug convictions are eligible. This deduction is subject to income limits described in Publication 970.
Although students may not be involved in preparing tax returns, they should be on the lookout for form 1098T and tell you if and when it is received. Reducing a parent’s tax liability frees up additional dollars that can be used to reduce the need to borrow more for college. These are described in IRS publication 970, for which you may qualify.