A Back-to-School Tax Break Refresher
September 23, 2015 6:12 PM
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Paying for College
With college being one of the biggest expenses your clients will face, it only makes sense to help them find some relief from a tax perspective.
With that in mind, Thomson Reuters editor and author Michael Sonnenblick has compiled this quick checklist of tax opportunities to go over with your clients during your next sit-down with them.
The list is brief and general, though, he warned, so for more information, and more specifics, refer to IRS Publication 970. (You can also see the full text version of his list
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1. Taxation of Scholarships, Fellowship Grants, Grants and Tuition Reductions
A scholarship or fellowship grant is tax-free only if the recipient is a candidate for a degree at an eligible educational institution. Fulbright grants, Pell grants and other Title IV need-based education grants, and benefits received from Veterans Affairs, are generally treated as a scholarship or fellowship grant. But payments that students at the military academies receive are not scholarships and are includable in income. Qualified tuition reductions are generally not includable in income.
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2. American Opportunity Tax Credit
A taxpayer may be able to claim a credit in 2015 for up to $2,500 for adjusted education expenses paid for each student who qualifies for the American Opportunity Tax Credit. Forty percent of this credit may be refundable. If a taxpayer elects to receive this credit, then they cannot also claim the Lifetime Learning Credit.
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3. Lifetime Learning Credit
If taxpayers cannot claim the AOTC, they might be able to claim the Lifetime Learning Credit. This is a credit of up to $2,000 for qualified education expenses paid for all eligible students that is nonrefundable (unlike the AOTC).
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4. Student Loan Interest Deduction
If a taxpayers modified adjusted gross income is less than $80,000 ($160,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan used for higher education. This deduction can reduce the amount of the taxpayers income subject to tax by up to $2,500 in 2015.
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5. Student Loan Cancellations and Repayment Assistance
Generally, if a taxpayer is responsible for making loan payments, and the loan is cancelled (forgiven), the taxpayer must include the amount that was forgiven in gross income for tax purposes. However, if the taxpayer fulfills certain requirements, two types of student loan assistance may be tax free. The types of assistance are student loan cancellation and student loan repayment assistance.
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6. Coverdell Education Savings Account
If a taxpayer meets the income requirements, they can contribute to a Coverdell ESA. Contributions are not deductible, but income in the account grows tax-free until it is distributed, and distributions are tax-free if they are not more than a designated beneficiarys qualified education expenses at an eligible educational institution.
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7. Qualified Tuition Programs (QTPs or 529 Plans)
Contributions are not deductible, but income in the plan grows tax-free and no tax is due on a distribution unless the amount distributed is greater than the beneficiarys adjusted qualified education expenses.
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8. IRA Distributions Not Subject to Additional Tax
Generally, if taxpayers take a distribution from an IRA before reaching age 59-½, they must pay a 10 percent additional tax on the early distribution. This applies to any IRA they own. However, taxpayers can take distributions from their IRAs for qualified higher education expenses without having to pay the 10 percent tax. They may owe income tax on at least part of the amount distributed, but they may not have to pay the 10 percent additional tax. Generally, if the taxable part of the distribution is less than or equal to the adjusted qualified education expenses, none of the distribution is subject to the additional tax. If the taxable part of the distribution is more than the AQEE, only the excess is subject to the additional tax.
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9. Education Savings Bond Program
Generally, taxpayers must pay tax on the interest earned on U.S. savings bonds. However, when taxpayers cash in certain savings bonds under an education savings bond program, they may be able to exclude the interest from income.
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10. Employer-Provided Educational Assistance
If someone receives educational assistance benefits from their employer under an educational assistance program, they can exclude up to $5,250 of those benefits each year. This means the employer should not include those benefits with the employees wages, tips, and other compensation shown on Form W-2, Box 1. This also means that the employee does not have to include the benefits on the income tax return. Since the assistance is not included on the tax return, the employee cannot use it to determine any other deductions or credits.
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11. Business Deduction for Work-Related Education
An employee who can itemize deductions may be able to claim a deduction for the expenses they paid for work-related education. The employees deduction will be the amount by which the qualifying work-related education expenses plus other job and certain miscellaneous expenses (except for impairment-related work expenses of disabled individuals) is greater than 2 percent of their adjusted gross income.
Self-employed individuals can deduct expenses for qualifying work-related education directly from their self-employment income. This reduces the amount of income subject to both income tax and self-employment tax. Work-related education expenses may also qualify the individual for other tax benefits, such as the AOTC and Lifetime Learning Credits. Taxpayers may qualify for these other benefits even if they do not meet the work-related business deduction requirements listed above. Also, work-related education expenses may qualify a taxpayer to claim more than one tax benefit. Generally, taxpayers may claim any number of benefits as long as they use different expenses to figure each one.
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12. Tuition and Fees Deduction
This is a trap for the unwary, as, for 2015 and beyond, there is no deduction for qualified tuition and fees. For 2014 and prior, a deduction of no more than $4,000 (based on MAGI) for qualified tuition and fees was allowable.
