College costs can be offset by tax deductions and credits
BY knowing the tax rules, college costs may be offset by tax deductions or credits on your tax return.
» Education deductions:
The cost of tuition and fees to attend college or graduate school can be deductible for yourself, your spouse, or your dependents.
Married couples filing a joint tax return can deduct up to $4,000 annually of qualifying expenses. This deduction is claimed on your Form 1040 and you don't have to itemize to get it. If your modified adjusted gross income (AGI) is above $130,000 ($65,000 for unmarrieds) but not above $160,000 ($80,000 for unmarrieds), up to $2,000 of qualifying expenses will be deductible.
No deduction will be allowed if modified AGI exceeds $160,000 ($80,000 for unmarrieds) or for married taxpayers filing separately.
Qualifying expenses are those for tuition and enrollment but not the cost of books, room and board, student activity fees, athletic fees, insurance, transportation costs or other personal expenses and do not include certain scholarships and other tax-free educational assistance.
The deduction is not available for expenses incurred for an individual if the HOPE or Lifetime Learning credit is claimed for that individual that year.
» Education credits:
Tax credits can be more beneficial for some. The HOPE credit and the Lifetime Learning credit are available for qualified tuition and related expenses paid to accredited schools or other recognized post-high school credential and certain vocational schools. These are expenses for tuition, books and academic fees, but not student activity fees, athletic fees, insurance expenses, room and board, and transportation costs.
The maximum HOPE credit is $1,650 per student (for both 2006 and 2007) for the first two years of undergraduate education, and is adjusted for inflation annually.
The maximum Lifetime Learning credit is $2,000 per year per taxpayer, for any post-high school education (including graduate-level coursed and courses to acquire or improve job skills) at an eligible educational institution.
Both the HOPE and Lifetime Learning credits are reduced if modified AGI is above $94,000 in 2007 ($90,000 for 2006) and is unavailable if it's more than $110,000 for married taxpayers filing a joint return.
For unmarried filers the phase-out range is $47,000 to $55,000. The credits are not available to married taxpayers filing separate returns.
» 529 plans:
If you are planning for future education costs for your children or grandchildren, you may have heard of qualified tuition plans or 529 plans.
There are two types of 529 plans. Prepaid plans allow you to buy tuition credits or certificates at present tuition rates. One you may be more familiar with is the 529 savings plan.
Your contribution to a 529 savings plan is not tax deductible; however, the earnings on the account aren't taxed while the funds stay in the program. In addition, distributions from the program are tax-free as long as they don't exceed the student's qualified higher education expenses, including tuition, fees, books supplies and required equipment. A reasonable amount for room and board is also a qualified expense for students that are enrolled at least half-time. A penalty is imposed on distributions in excess of qualified expenses.
Your contributions to the plan are treated as a gift to the student beneficiary, but the contributions qualify for the annual gift tax exclusion, which is $12,000 for 2007. If your contribution exceeds the annual exclusion, there are additional methods to reduce or eliminate the gift tax impact.
In addition to the annual gift-tax exclusion, you are allowed an unlimited gift-tax exclusion for tuition paid directly to an educational organization on behalf of another individual.
As you can see, there are a variety of tax strategies available to assist with education costs. These rules are not intended to be comprehensive but to give you enough information or "education" to start a discussion with your advisors.
Deneen Nakashima is a senior tax manager in the Honolulu office of Grant Thornton LLP. She can be reached at firstname.lastname@example.org